May 26, 2021

Anti-Money Laundering 2021

This AZB Practice Guide – Anti Money Laundering provides an interesting insight into what exactly constitutes money laundering and the legal framework governing India’s anti-money laundering laws and regulations. It highlights the main elements of these laws in India, various aspects of their criminal enforcement, penalties, and the role of government entities in enforcement of anti-money laundering measures. 

1.1. Attorney–client communications doctrine

1.1.1. Identify and describe India’s laws, regulations, professional rules and doctrines that protect communications between an attorney and a client from disclosure.

Professional communication between an attorney and a client is accorded protection under the Indian Evidence Act 1872 (the Evidence Act), the Advocates Act 1961 (the Advocates Act) and the Bar Council of India Rules (the BCI Rules). This protection is a rule of evidence (as opposed to other statutory protection) and is subject to certain limitations Sections 126 to 129 of the Evidence Act are a codification of the principles of common law on professional communications between attorneys and clients. Any person who seeks advice from a practising advocate, registered under the Advocates Act, would have the benefit of the attorney-client privilege and his or her communication would be protected. Attorneys cannot, without the express consent of the client:

  • disclose any communication made during the course of or for the purpose of his or her employment as such attorney, by or on behalf of his or her client;
  • state the contents or condition of any document with which he or she has become acquainted in the course of and for the purpose of his or her professional employment; or
  • disclose any advice given by him or her to his or her client in the course and for the purpose of such employment.

There are certain limitations to privilege and the law does not protect the following from disclosure:

  • disclosures made with the client’s express consent;
  • any such communication made in furtherance of any illegal purpose; or
  • any fact observed by any attorney in the course of his or her employment, showing that any crime or fraud has been committed since the commencement of his or her employment.

The fact that the attention of the attorney was or was not directed to such fact by or on behalf of his or her client is not material in this regard. Further, under section 129 of the Evidence Act, no one shall be compelled to disclose to the court any confidential communication that has taken place between him or her and his or her attorney, unless they have offered themselves as a witness, in which case they may be compelled to disclose any communication as may appear to the court necessary to be known to explain any evidence that they have given, but no other. Communications between an attorney and client are privileged even if they contain information from third parties. The prohibition on disclosure of confidential information also extends to any interpreters, clerks or servants of the attorney. While the attorney-client privilege continues even after the employment has ceased, there is no privilege to the communications made before the creation of an attorney-client relationship (Kalikumar Pal v Rajkumar Pal 1931 (58) Cal 1379). The prohibitions on disclosure of attorney-client communications are further bolstered by the provisions of the BCI Rules enacted under the Advocates Act, which govern the conduct of advocates in India. The BCI Rules stipulate certain standards of professional conduct and etiquette for all attorneys. These provide that ‘An advocate shall not, directly or indirectly, commit a breach of the obligations imposed by section 126 of the Evidence Act’, thus reiterating the spirit of attorney-client privilege (Rule 17, Chapter II, Part VI). Further, Rules 7 and 15 of the BCI Rules on An Advocate’s Duty Towards the Client provides as follows: Rule 7: Not disclose the communications between client and himself: An advocate should not by any means, directly or indirectly, disclose the communications made by his client to him. He also shall not disclose the advice given by him in the proceedings. However, he is liable to disclose if it violates section 126 of the Indian Evidence Act 1872. Rule 15: An advocate should not misuse or takes advantage of the confidence reposed in him by his client. A breach of the above Rules would subject an advocate to disciplinary proceedings. Given the above, privileged communication between an attorney and a client are not admissible as evidence. Since the law on privilege is governed by the Evidence Act, one (possibly unintended) consequence is the argument that attorney-client communications are strictly not protected from law enforcement agencies in the course of investigations. That said, any privileged material, if produced, may not be admissible as evidence in court proceedings.

1.1. Domestic law

1.1.1. Identify India’s money laundering and anti-money laundering (AML) laws and regulations. Describe the main elements of these laws.

The Prevention of Money Laundering Act 2002 (the PML Act), together with the rules issued thereunder and the rules and regulations prescribed by regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), set out the broad framework for the anti-money laundering laws in India. Some of the primary rules and guidelines regulating money laundering activities in India include:

  • the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), issued under the PML Act;
  • the Master Circular on Guidelines on Anti-Money Laundering (AML) Standards/Combating Financing of Terrorism (CFT)/Obligations of Intermediaries under the Prevention of Money Laundering Act 2002 and the rules framed thereunder, issued by SEBI on 15 October 2019 (the SEBI AML Guidelines); and
  • the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016, issued by the RBI on 25 February 2016, as updated on 1 April 2021, which is the most up-to-date consolidation of the KYC guidelines and norms for all entities regulated by the RBI (the RBI KYC Master Directions).

The PML Act The PML Act was enacted by the Indian parliament in 2002 and came into force in 2005. It was enacted following the adoption of the Political Declaration and Global Programme of Action by the United National General Assembly in February 1990, which called upon member states to develop money laundering legislations and programmes. The PML Act not only criminalises the offence of money laundering but also puts in place preventive measures. These measures are proposed to be achieved through provisional attachment of ‘proceeds of crime’, which are likely to be concealed, transferred or dealt with in a manner that may obstruct proceedings, and through obligations imposed on banks, financial institutions and intermediaries to maintain records and supply information regarding certain types of transactions. The PML Act provides for the appointment of authorities to administer and enforce the provisions of the PML Act. These authorities are vested with powers, similar to those vested in a civil court, to provisionally attach property involved in money laundering, issue summons and search, seize and arrest with regard to proceeds of crime. Under the PML Act, financial institutions and intermediaries, reference to which includes, inter alia, non-banking financial companies (NBFCs), stockbrokers and payment system operators, are required to maintain records of transactions of a prescribed nature and above certain thresholds. The procedure and manner for providing such information is prescribed by the RBI in consultation with the central government. Although there is limited jurisprudence on the interpretation of provisions of the PML Act, as a general principle of law in India, courts have widely accepted the position that criminal statutes must be construed strictly, and that for a penalty to be imposed under any criminal statute, an offence must have been committed that falls not only within the letter but also within the spirit of the statute (see Glaxo Industries v Presiding Officer, Labour Court, Meerut AIR 1984 SC 505). However, the courts in India have also held that where a plain reading of the statute does not cover the objectives of the legislature in passing the law, the courts must also have due consideration for those objectives while interpreting the provisions of the statute. The above principle is especially important in the context of socio-economic statutes, such as those dealing with corruption or violations of foreign exchange laws. Thus, one may view that the PML Act, if litigated before Indian courts, may also be interpreted and enforced in line with the above principles. The PML Rules The PML Rules have been issued by the central government in consultation with the RBI, setting out the process to be adopted by banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries (collectively, reporting entities) for identifying and verifying their clients before commencing a business relationship with them. The PML Rules also prescribe exhaustive requirements for reporting entities to establish and verify the identity of any client at the time of operating an account or executing a transaction, including prescribing the documents that the reporting entity should seek from a client and maintain on record. The definitions of the terms ‘financial institutions’, ‘designated persons’ and ‘intermediaries’ are extremely wide under the PML Act. The PML Rules cast obligations on reporting entities to maintain records of certain prescribed transactions, which include all transactions in excess of a certain value, series of interconnected transactions that may cumulatively amount to a prescribed value and suspicious transactions (as defined in the PML Rules), regardless of whether the transactions are effected in cash. The PML Rules stipulate that reporting entities should follow the procedures and manner of maintenance of records prescribed by their respective regulators. In this regard, the RBI has issued the RBI KYC Master Directions for banks and financial institutions, and the SEBI has issued the SEBI AML Guidelines for SEBI-registered intermediaries. The RBI KYC Master Directions The RBI KYC Master Directions were issued by the RBI and are applicable to all entities regulated by RBI (regulated entities), including banking companies and NBFCs. The purpose of the RBI KYC Master Directions is to prevent regulated entities from being used for money laundering or terrorist financing activities. The RBI KYC Master Directions require regulated entities to put in place requirements establishing the identity of customers, categorising customers based on the degree of risk they may pose, undertaking client due diligence (CDD) (including enhanced CDD for high-risk customers and beneficiary accounts) and procedures for dealing with various types of transactions, such as cross-border transactions, and reporting such transactions to the Financial Intelligence Unit (FIU). The SEBI AML Guidelines The SEBI AML Guidelines were issued by the SEBI and are applicable to SEBI-registered intermediaries. The SEBI AML Guidelines require that intermediaries must put in place policies and procedures to combat money laundering, which should include:

  • communication of group policies relating to the prevention of money laundering and terrorist financing to all management and relevant staff members that handle account information, securities transactions, the client acceptance policy and CDD measures (including requirements for proper identification);
  • maintenance of records;
  • cooperation with the relevant law enforcement authorities (including the timely disclosure of information); and
  • the role of internal audits or compliance functions to ensure compliance with the policies, procedures and controls relating to the prevention of money laundering and terrorist financing.

 

1.2. In-house and outside counsel

1.2.1. Describe any relevant differences in India between the status of private practitioners and in-house counsel, in terms of protections for attorney-client communications.

The concept of attorney-client privilege concerning the position of an in-house counsel is not free from doubt. This question has been the subject matter of judicial interpretation. This is because in-house counsel are not considered ‘advocates’ under the Advocates Act; however, the position regarding attorney-client privilege is not necessarily impacted by the same. Section 2(a) of the Advocates Act defines an advocate as an individual whose name is entered in any roll under the Advocates Act, and section 29 of the Advocates Act states that only an advocate is entitled to practise the profession of law in India (which includes appearing and/or practising in the courts, and practice of law outside the court by giving legal advice, drafting or drawing legal documents or advising clients on non-contentious matters). Rule 49 of the BCI Rules states that an advocate shall not be a full-time salaried employee of any person, government, firm, corporation or concern, as long as he or she continues to practise and shall, on taking up any such employment, disclose the fact to the Bar Council on whose roll his or her name appears, and shall thereupon cease to practise as an advocate so long as he or she continues in such employment. However, an exception is made in such cases of law officers of the central government, any state government or of any public corporation or of body constituted by statute despite being a full-time salaried employee, if such law officer is required to act or plead in court on behalf of others. It is therefore often argued that an in-house lawyer (ie, one who draws a salary) cannot practise as an advocate until such time that he or she is in full-time employment (Sushma Suri v Government of National Capital Territory of Delhi (1999) 1 SCC 330). The Supreme Court of India clarified this question of law in Satish Kumar Sharma v Bar Council of Himachal Pradesh (2001) 2 SCC 365. On whether a salaried employee can be an ‘advocate’ under the Advocates Act, the court held: The test, therefore, is not whether such person is engaged on terms of salary or by payment of remuneration, but whether he is engaged to act or plead on its behalf in a court of law as an advocate. In that event the terms of engagement will not matter at all . . . If the terms of engagement are such that he does not have to act or plead, but does other kinds of work, then he becomes a mere employee of the Government or the body corporate. Therefore, the Bar Council of India has understood the expression advocate as one who is actually practising before courts which expression would include even those who are law officers appointed as such by the Government or body corporate. However, the distinction between lawyers who are engaged to act or plead as advocates and lawyers who are employees does not materially alter the position of law in respect of attorney-client privilege. This has been clarified by the Bombay High Court in the cases of Municipal Corporation of Greater Bombay v Vijay Metal Works and Larsen & Toubro Ltd v Prime Displays (P) Ltd. In Municipal Corporation of Greater Bombay v Vijay Metal Works, AIR 1982 Bom 6, the Bombay High Court, while considering whether privilege would extend to communications between an in-house counsel and the client, has held that a paid or salaried employee who advises his or her employer, on all questions of law and relating to litigation, must get the same protection of the law and therefore any such communication made in confidence by his or her employer to him or her to seek legal advice or vice versa should get the protection of sections 126 and 129 of the Evidence Act. The Court further distinguished that such protection may not extend to the work undertaken by an in-house legal counsel for his or her employer that is in another capacity (such as work of an executive nature). Communications exchanged in any other capacity (not legal) would not be subject to legal professional privilege under sections 126 to 129 of the Evidence Act. In Larsen & Toubro Ltd v Prime Displays (P) Ltd [2003] 114 Comp Cas 141 (Bom), the Bombay High Court observed that: It is, thus, clear that, even according to the applicant, in order that an advice given by an internal legal department of the applicant becomes entitled to protection, under section 129, that advice must be given by a person who is qualified, to give legal advice. This observation appears to indicate that where the in-house counsel would, save for his or her employment with the concerned litigant, be otherwise qualified to give legal advice, then privilege under sections 126 and 129 of the Evidence Act would attach itself to the advice given by that in-house counsel. The Court in Larsen & Toubro, however, did not make any finding on this issue, owing to a lack of pleadings on the issue. In Larsen & Toubro, the Court also permitted a claim of privilege in the case of certain documents, which included communications between the company and in-house counsel, but solely on the ground that the same had been created in anticipation of litigation (which the court held to be otherwise covered by attorney-client privilege).

1.2. Investigatory powers

1.2.1. Describe any specific powers to identify proceeds of crime or to require an explanation as to the source of funds.

The Directorate of Enforcement has been given wide powers under the PML Act to conduct search and seizure when it believes that a person has committed any act constituting money laundering, or is in possession of proceeds of crime, records or property relating to money laundering. When any property or record is attached or seized, an application or complaint must be filed before the Adjudicating Authority, which has been constituted to exercise jurisdiction, powers and authority conferred by or under the PML Act. Typically, a criminal court or a special court set up for this purpose is appointed and vested with the powers of the Adjudicating Authority under the PML Act. The Adjudicating Authority has been given powers under section 8 of the PML Act to serve a notice, if it has reason to believe that any person has committed an offence of money laundering or is in possession of proceeds of crime, calling upon the person to indicate the sources of his or her income, earnings or assets out of which or by which means he or she acquired the property that has been seized, attached or frozen and the evidence on which the person relies, as well as to show cause as to why those properties should not be declared to be properties involved in money laundering and confiscated by the central government. An Adjudicating Authority has, for the purposes of the PML Act, been vested with the same powers as that of a civil court under the Code of Civil Procedure 1908, including, inter alia, in relation to discovery and inspection, compelling the production of records, receiving evidence on affidavits, enforcing the attendance of any person, etc.

1.3. Work-product doctrine

1.3.1. Identify and describe India’s laws, regulations, professional rules and doctrines that provide protection from disclosure of tangible material created in anticipation of litigation.

All work-products created (tangible or intangible) and communication exchanged between a client and attorney in anticipation of litigation will be privileged communication). This includes communication to:

  • obtain advice for the litigation;
  • obtain or collect evidence to be used in the litigation; and
  • obtain information that will lead to such evidence, drafts of notices, pleadings and so forth exchanged between the attorney and the client.

Information called for by the client and provided by an employee or a third-party agent, on the request of, and for submission to, the attorney may also be protected (Woolley v North London Railway (1868–1869) LR 4 CP 602). In D Veerasekaran v State of TN (1992 CriLJ 2168 (Mad), an unsigned and undated letter allegedly written by an advocate, advising his client (who was charged with terror offences) was cited as evidence of the advocate having abetted the terror charges. The court observed that even if the said letter was written by the advocate to a client, it would be treated as a professional communication and could not be used against the advocate. However, communication between the employees of the client in the ordinary course of business, which may have utility for anticipated litigation, is not protected. Accordingly, there is no protection accorded to the following:

  • for statements made by an employee regarding the subject matter of certain suit proceedings that were not to be submitted to their attorney (The Central India Spinning Weaving and Manufacturing Co Ltd v G I P Railway Co, AIR 1927 Bom 367); and
  • letters written by one employee to another regarding information that could potentially become useful to their attorney (Bipro Doss Dey v Secretary of State for India in Council (1885) ILR 11 Cal 655).

 

1.4. Recent case law

1.4.1. Identify and summarise recent landmark decisions involving attorney-client communications and work-product.

In Vijay Metal Works, the Bombay High Court held that a salaried employee who advises his or her employer on legal questions would be afforded the same privileges and protections under sections 126 and 129 of the Evidence Act as afforded to practising advocates. In Larsen & Toubro, a petition was filed for winding up filed by the respondents against the petitioner company. The Bombay High Court in this regard held that section 126 of the Evidence Act protect the documents prepared by the client in anticipation of litigation either for seeking legal advice or for using them in that litigation. If an associate or advocate works for another advocate and his clients, he or she owes an obligation not only to maintain the confidentiality between the client and his or her advocate but also not to surreptitiously take away what is the final product of the effort put in to which he or she may also be a party. The protection under section 126 of the Evidence Act would apply to an advocate and his clients and any misuse of the same could make him or her liable if it is founded on confidential drafts being taken away by the associate or advocate and being misutilised. (Diljeet Titus & Ors V Alfred A Adebare & Ors 130 (2006) DLT 330). The Right to Information Act 2005 (the RTI Act) enables Indian citizens to access information held by public authorities. This has raised interesting questions about attorney-client privilege as grounds for refusing to disclose professedly public information in the hands of public authorities. In Mukesh Agarwal v Public Information Officer, Reserve Bank of India [2012] CIC 11210, the Central Information Commission (CIC) held that while there may be a fiduciary relationship in respect of communication from the client to his or her attorney, there is no fiduciary relationship in respect of communication from the attorney to the client when the client is a public body with public responsibility under the RTI Act. Section 8.1(e) of the RTI Act excludes disclosure of information available to a person in his or her fiduciary relationship unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information. The CIC, in this case, held that there was a larger public interest warranting disclosure and accordingly ruled in favour of the citizen seeking information. The same principle was applied by the CIC in 2015, in Alok Srivastava v CPIO, English & Foreign Language University, where the court held that the client (being a public university with an aforementioned public responsibility) was directed to disclose material information as there was a public interest that outweighed the protected interest. These CIC cases show that traditional attorney-client privilege does not apply to governmental entities if the exception provided in section 8.1(e) of the RTI Act applies. In The Superintendent, High Court v The Registrar, Tamil Nadu Information Commission and M Sivaraj, 2010 (5) CTC 238, it was held that even though the office of the public prosecutor is a public authority, the RTI Act only requires the public prosecutor to furnish such information, which is available to him or her and capable of being furnished, subject to section 8(1)(e) of the RTI Act. Here, the public prosecutor, bound by attorney-client privilege to not disclose information provided to it by the state of Tamil Nadu, directed a citizen seeking information to approach the state of Tamil Nadu directly. The Madras High Court, which was approached in this connection, held that: Instead of asking the [Public Prosecutor], who holds such information in the capacity of counsel, the petitioner is very well entitled to approach the client, ie, the State of Tamil Nadu directly for getting such information. In Cecilia Fernandes v State represented by the Director General of Police Goa and Anr, Criminal Miscellaneous Application No. 9 of 2005, the Bombay High Court held that the right to consult a legal practitioner under article 22(1) of the Constitution of India could only be exercised meaningfully in confidence. Thus, a police officer, while entitled to stay within a certain distance of an accused, cannot insist on being within hearing distance to prevent an accused from instructing his or her lawyer in confidence.

2.1. Criminal enforcement

2.1.1. Which government entities enforce India’s money laundering laws?

The Directorate of Enforcement (ED), which is under the administrative control of the Department of Revenue, the Ministry of Finance, the Indian government and the director of the Financial Intelligence Unit (FIU) under the Department of Revenue of the Ministry of Finance have been appointed to exercise exclusive powers under specific sections of the Prevention of Money Laundering Act 2002 (the PML Act). Additionally, section 54 of the PML Act provides that certain officers are empowered and required to assist authorities under the Act with enforcement, including:

  • officers of the Customs and Central Excise Departments;
  • officers appointed in terms of certain provisions of the Narcotic Drugs and Psychotropic Substances Act 1985;
  • members and officers of recognised stock exchanges under the Securities Contracts (Regulation) Act 1956;
  • income tax authorities under the Income Tax Act 1961;
  • officers of the Reserve Bank of India (RBI);
  • officers of the police;
  • officers of enforcement appointed under the Foreign Exchange Management Act 1999;
  • officers of the Securities and Exchange Board of India (SEBI);
  • officers of the Insurance Regulatory and Development Authority;
  • officers of the Forward Markets Commission;
  • officers and members of associations recognised under the Forward Contracts (Regulation) Act 1952;
  • officers of the Pension Fund Regulatory and Development Authority;
  • officers of the Department of Posts in the Indian government;
  • registrars and sub-registrars appointed by state governments under the Registration Act 1908;
  • registering authorities empowered to register motor vehicles under the Motor Vehicles Act 1988;
  • officers and members of the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India;
  • officers of any other body corporate that is established under a state or central legislation; and
  • such other officers of the central government, state government, local authorities or reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) who may be notified by a special order of the central government.

The PML Act specifically mandates assistance and cooperation between the above-mentioned authorities since an essential element for the commission of the offence of money laundering is being involved in a process or activity connected with the ‘proceeds of crime’ (including its concealment, possession, acquisition or use), and projecting or claiming those proceeds of crime as untainted property. The PML Act defines ‘proceeds of crime’ to mean any property (or the value of any property) derived or obtained, directly or indirectly, by any person as a result of any offence under the Indian penal statutes set out in the Schedule to the PML Act (scheduled offences); or where such property is taken or held outside the country, the property equivalent in value held within the country or abroad. It has been clarified in an explanation that ‘proceeds of crime’ include not only property that is derived or obtained from scheduled offences but also any property that may directly or indirectly be derived or obtained as a result of any criminal activity that is relatable to a scheduled offence. Part XIV of the Finance Act 2018, which came into effect on 19 April 2018, amended the definition of ‘proceeds of crime’ such that the right of attachment also extends to property (equivalent to the proceeds of crime) held outside India. Scheduled offences are the predicate offences for the commission of the offence of money laundering. Accordingly, if any transaction is not linked to a scheduled offence, the funds relating to those transactions would not constitute proceeds of crime, and, therefore, dealing in those funds would not amount to money laundering. The investigation of the offence of money laundering is, therefore, inextricably linked to the investigation of the scheduled offence, and it is on account of this that various investigative agencies have been directed in terms of the PML Act to coordinate and cooperate with the ED. Scheduled offences and the offence of money laundering are proposed to be tried together by a special court constituted by the PML Act that has jurisdiction over the area in which the offence has been committed. Section 43 of the PML Act provides that the central government may, in consultation with the Chief Justice of the relevant High Court, designate one or more sessions courts as a special court. Accordingly, the commission of a scheduled offence must be alleged before the special court that is trying the offence of money laundering under the PML Act, and evidence and material relating to the scheduled offence must be placed before the special court to enable it to frame a charge in respect of the offence and try it (see Hasan Ali Khan v Union of India (2012 BomCR (Cri) 807)). The Finance Act 2015 introduced certain amendments to the PML Act, including the replacement of the Adjudicating Authority with a special court, which will be authorised to adjudicate on and finalise an order of attachment of property. Additionally, a provision was also included in the PML Act that permits the special court to direct that any property that stands confiscated to the central government be restored to a claimant with a legitimate interest in the property who, acting in good faith, may have suffered a quantifiable loss as a result of the offence of money laundering, despite having taken all reasonable precautions. The special court has been empowered to consider the claim for restoration of such a claimant during the trial of the offence. Pursuant to amendments made to the PML Act by the Finance Act 2016, the appellate tribunal constituted under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act 1976 has been deemed to be the appellate tribunal for hearing appeals against the orders of the Adjudicating Authority and the director of FIU under the PML Act.

2.10. Extraterritorial reach of money laundering law

2.10.1. Do the money laundering laws applicable in India have extraterritorial reach?

The PML Act applies to the whole of India; however, its application is not restricted to property situated in India. The term ‘property’ is defined under the PML Act to include any property or assets, wherever located, so long as it is derived from, arises out of or is related to any of the scheduled offences. The amendment to the definition of ‘proceeds of crime’ under the PML Act, by the Finance Act 2015, enables the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, the Finance Act 2018 has amended the definition of ‘proceeds of crime’ such that this right of attachment also extends to property (equivalent to the proceeds of crime) held outside India. To give effect to this limited extraterritorial application in the context of certain specified offences that may be committed abroad (which also constitute scheduled offences if committed in India) but the proceeds of which may have been remitted to India, or where the scheduled offence may have been committed in India but the proceeds of the crime are remitted abroad, section 56 of the PML Act empowers the central government to enter into reciprocal arrangements with the government of any country outside India for enforcing the provisions of the PML Act and for the exchange of information for the prevention of any offence under the PML Act or under the corresponding law in force in that country, or for investigation under the PML Act. On 1 August 2018, the government notified the Fugitive Economic Offenders Act 2018 (the Economic Offenders Act), effective retrospectively from 21 April 2018, to deter fugitive economic offenders from evading the process of law by staying outside the jurisdiction of Indian courts. For operationalising the Economic Offenders Act, the Fugitive Economic Offenders (Procedure for Conducting Search and Seizure) Rules 2018 have also been notified with effect from 24 August 2018. Some of the key provisions of the Economic Offenders Act are set out below:

  • a ‘fugitive economic offender’ is defined as an individual against whom an arrest warrant has been issued for committing any prescribed offence (where the value exceeds 1 billion rupees), and has left the country to avoid facing prosecution or has refused to return to face prosecution;
  • if any person against whom an application has been filed fails to appear (in person or through counsel) after a notice issued by the special court, then the person may be declared a ‘fugitive economic offender’;
  • any property of the fugitive economic offender can be attached for 180 days unless further extended by the special court. The properties will be released if the person is not found to be a fugitive economic offender at the conclusion of proceedings; and
  • the special court is entitled to confiscate properties, free of encumbrances, of any person declared as a ‘fugitive economic offender’ that are proceeds of a crime in India or abroad, benami properties in India or abroad or any other property in India or abroad. However, the special court is empowered to exempt from confiscation, any property in which a third party has a bona fide interest, without knowledge of the fact that the property is a proceed of crime.

The PML Act also contemplates ‘offences of cross-border implications’, which are:

  • offences committed or related to conduct outside India that constitute an offence in that jurisdiction and are scheduled offences under the PML Act, and a part of or all the proceeds of crime arising from such conduct are remitted to India; or
  • scheduled offences committed in India, and part of or all the proceeds of crime have been transferred or have been attempted to be transferred from India to a place outside India.

Offences with cross-border implications are scheduled offences under the PML Act and, accordingly, the PML Act may be applicable to those offences. In addition to this, the Black Money Act provided for a three-month window from 1 July 2015 to 30 September 2015 within which a person could make a declaration in respect of his or her undisclosed assets located outside India, and pay the prescribed rate of tax and penalty on those foreign assets on or before 31 December 2015, failing which those individuals would be subject to all the provisions of the Black Money Act, including penalties and prosecutions. The offence of wilful attempt to evade tax under section 51 of the Black Money Act has also been included in the list of scheduled offences under the PML Act, and accordingly, the PML Act may be applicable to those offences. Further, the UN Security Council Resolution 1373 obliges countries to freeze without delay the funds or other assets of:

  1. persons who commit, or attempt to commit, terrorist acts, or participate in or facilitate the commission of terrorist acts;
  2. entities owned or controlled directly or indirectly by (1); and
  3. persons and entities acting on behalf of, or at the direction of, (1) or (2), including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by those persons and associated persons and entities.

Each country has the authority to designate the persons and entities that should have their funds or other assets frozen. Additionally, to ensure that effective cooperation is developed among countries, countries should examine and give effect to, if appropriate, the actions initiated under the freezing mechanisms of other countries. To give effect to the requests of foreign countries under UN Security Council Resolution 1373, the Ministry of External Affairs will examine the requests made by foreign countries and forward it electronically, with their comments, to a designated officer for the freezing of funds or other assets. Freezing orders take place without prior notice to the designated persons involved.

2.2. Defendants

2.2.1. Can both natural and legal persons be prosecuted for money laundering?

Under the PML Act, both natural and legal persons can be prosecuted for money laundering. The term ‘person’ under the PML Act has been defined to include individuals, companies, firms, associations of persons (whether incorporated or not), artificial juridical persons and agencies, offices and branches owned or controlled by any such natural or legal person. The PML Act provides for a wide range of penal actions that may be taken against persons in possession of proceeds of crime who have committed scheduled offences. Under section 70 of the PML Act, if a body corporate (including a firm or association of individuals) contravenes any of the provisions of the PML Act, the persons in charge of the body corporate (and responsible to the body corporate for the conduct of its business) at the time of commission of the offence by the body corporate and the body corporate itself will be deemed to be guilty of the contravention of the provisions of the PML Act. However, section 70 of the PML Act provides that persons in charge of the company will not be liable for the contravention if they are able to prove that the contravention of the PML Act by the body corporate took place without their knowledge or that they exercised all due diligence to prevent the commission of such an offence by the body corporate. Further, where a contravention by a body corporate is attributable to any particular director, officer, secretary or manager (either on account of his or her consent, connivance or negligence), the director, officer, secretary or manager may also be prosecuted separately under the PML Act for the contravention committed by the body corporate.

2.3. The offence of money laundering

2.3.1. What constitutes money laundering?

Offence of money laundering Money laundering is defined in the PML Act as direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or having actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such property as untainted property. Under section 3 of the PML Act, the following actions are tantamount to the offence of money laundering:

  • a direct or indirect attempt to indulge in any process or activity that is connected with the proceeds of crime (including its concealment, possession, acquisition or use), with the intention of projecting or claiming those proceeds of crime as untainted property;
  • any direct or indirect assistance in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property, provided that assistance is knowingly given; and
  • being, directly or indirectly, a knowing party to or being involved in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property.

Further, in the case of Hasan Ali Khan v Union of India, the Bombay High Court held that an offence is committed under the PML Act only when an attempt is made to demonstrate a legitimate source of earning with respect to a tainted property, namely with respect to proceeds of crime. In terms of section 24 of the Act, where there are any proceedings relating to proceeds of crime under the PML Act, in the case of a person involved in the offence of money laundering, unless the contrary is proved, it is presumed that the proceeds of crime are involved in the offence of money laundering. The PML Act sets out certain specific offences that are referred to as ‘scheduled offences’ under the PML Act. These scheduled offences are further subdivided into three categories, namely Part A, Part B and Part C offences. The commission of any offence mentioned in Part A of the Schedule to the PML Act (Part A offence) or Part C of the Schedule to the PML Act (Part C offence) constitutes a scheduled offence. Part C offences are those that have cross-border implications and are Part A offences, offences against property under Chapter XVII of the Penal Code 1860 (PC) or offences of wilful attempts to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 (the Black Money Act). The commission of an offence mentioned in Part B of the Schedule to the PMLA (Part B offence) constitutes a scheduled offence only if the total value involved in the offence is equal to or greater than 10 million rupees. To constitute an offence of money laundering under section 3 of the PML Act, a person must knowingly assist or knowingly be a party to any process or activity connected with the proceeds of crime and in the projection or claiming of such proceeds of crime as untainted property, or be involved in concealing, acquiring or using such proceeds of crime. Therefore, the element of knowledge is an important constituent for the offence of money laundering in India; thus, a strict liability standard may not be applicable in India in the context of an offence of money laundering. The term ‘knowledge’ was specifically inserted into section 3 of the PML Act after deliberations over the draft bill in Parliament prior to the passing of the PML Act. Therefore, the legislative intent of the Parliament in this regard seems quite clear. Banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries (collectively, reporting entities) can be prosecuted or pursued for money laundering offences committed by their clients if it can be demonstrated that they were aware of the commission of a scheduled offence, knowingly became recipients of the proceeds of crime and projected the proceeds as untainted property. The obligations cast on the reporting entities in terms of the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016 (the RBI KYC Master Directions) and the Master Circular on Guidelines on Anti-Money Laundering (AML) Standards/Combating Financing of Terrorism (CFT)/Obligations of Intermediaries under the Prevention of Money Laundering Act 2002 and the rules framed thereunder (the SEBI AML Guidelines) are to exercise due diligence in their dealings with clients and to maintain and supply records of certain prescribed dealings with clients. Accordingly, although the exercise of diligence on the part of the reporting entities does not constitute a defence under the PML Act and the PML Rules, it may be used as a factor in demonstrating the lack of knowledge of the commission of money laundering by their clients.

2.4. Qualifying assets and transactions

2.4.1. Is there any limitation on the types of assets or transactions that can form the basis of a money laundering offence?

Determination of the commission of a scheduled offence is required to ascertain whether the offence of money laundering has been committed. For such a determination, a monetary threshold has been prescribed for certain scheduled offences (namely, Part B offences). Part B offences include offences of false declarations and false documents under section 132 of the Customs Act 1962, for which a monetary threshold of 10 million rupees has been prescribed. Accordingly, only if the total value involved in the commission of such a Part B offence exceeds 10 million rupees would the other elements of the offence of money laundering be satisfied. In the context of a Part A offence and an offence of cross-border implications, however, the above monetary threshold does not apply.

2.5. Predicate offences

2.5.1. Generally, what constitute predicate offences?

The Schedule to the PML Act sets out a list of offences (ie, scheduled offences), the commission of which are a prerequisite to determine whether the offence of money laundering has been committed. These include certain identified offences under the Indian Penal Code 1860 (IPC) (including, inter alia, criminal conspiracy, counterfeiting, kidnapping, extortion, robbery, receiving stolen property and fraud), the Arms Act 1959 (relating to, inter alia, the manufacturing and selling of arms and ammunition in contravention of the Arms Act), the Prevention of Corruption Act 1988 (PCA), the Wildlife (Protection) Act 1972, the Immoral Traffic (Prevention) Act 1956 and the Narcotic Drugs and Psychotropic Substance Act 1985 (the NDPS Act). Further, if the offence of a deliberate attempt to evade tax under section 51 of the Black Money Act has cross-border implications, then it is a scheduled offence under the PML Act. Commission of a scheduled offence is a sine qua non for constituting the offence of money laundering under the PML Act (see P Chidambaram v Directorate of Enforcement (AIR 2019 SC 4198)). Under the Black Money Act, wilful non-filing of returns or non-declaration of foreign incomes or assets in the periodic income tax returns is punishable by rigorous imprisonment for a period between six months and seven years. However, a declarant who has made a declaration under section 59 of the Black Money Act is immune from the PML Act to the extent of the scheduled offence of wilful attempt to evade tax, in respect of those declared assets. The Finance Act 2018, which came into effect on 1 April 2018, also incorporated corporate fraud under the Companies Act 2013 in the list of scheduled offences under the PML Act. Further, through certain amendments to the PCA, with effect from 26 July 2018, the ambit of certain offences thereunder was widened, and certain additional offences were also added. Consequential amendments have also been made to the list of scheduled offences in the PML Act. As a result, the updated list of scheduled offences under the PML Act also includes, inter alia, offences such as bribing a public servant by a commercial organisation and taking an undue advantage to influence a public servant by corrupt or illegal means or by exercising personal influence as well as punishment for habitual offenders. If vast sums of money arise from criminal acts that are not scheduled offences, even if attempts have been made to project these as legitimate earnings, the offence of money laundering could not have occurred as the predicate offence would not have been committed (Hasan Ali Khan v Union of India). The jurisdiction of the PML Act applies where an offence is committed by a person outside India and the offence would also constitute a scheduled offence (had it been committed in India), and any part of the proceeds of the offence have been remitted to India. Further, the jurisdiction of the PML Act also extends to situations where the scheduled offences have been committed within India, and all or part of the proceeds of crime have been remitted outside India.

2.6. Defences

2.6.1. Are there any codified or common law defences to charges of money laundering?

There are no codified defences to the charge of money laundering other than demonstrating a lack of knowledge.

2.7. Resolutions and sanctions

2.7.1. What is the range of outcomes in criminal money laundering cases?

An offence of money laundering is punishable by imprisonment for a term of between three years and seven years and, additionally, a fine. The maximum term of imprisonment may extend to 10 years if the proceeds of crime relate to an offence under the NDPS Act (which deals with crimes relating to narcotics). Plea bargaining is available in terms of the Code of Criminal Procedure 1973 (CrPC), although not for:

  • offences that have been notified by the government as affecting the ‘socio-economic condition of the country’; or
  • offences where the punishment prescribed by law is:
    • death;
    • life imprisonment; or
    • imprisonment for a term in excess of seven years.

The offence of money laundering has not yet been notified as affecting the ‘socio-economic condition of the country’ and is, accordingly, not precluded from being eligible for plea bargaining. Further, given that the maximum punishment is seven years’ imprisonment (except in the case of proceeds of crime arising out of an offence under the NDPS Act), plea bargaining should be available for the offence of money laundering. In this regard, if the courts in India consider the PML Act as a socio-economic statute like the corruption laws and other statutes, then plea bargaining may not be available. The process for plea bargaining involves the accused making an application to the court and, upon the court being satisfied that the application was made voluntarily, making an order for the accused to work out a mutually satisfactory disposition of the case that may include the accused giving to the victim the compensation and other expenses during the case and thereafter. Under the PML Act, fines ranging from 10,000 rupees to 100,000 rupees for each failure can be imposed on a reporting entity if it has failed to maintain records or supply information in the manner prescribed under the PML Act and the PML Rules. In addition, although the PML Act and PML Rules do not provide for the revocation of licences of reporting entities, this may be possible based on the circulars relating to KYC and AML, issued by the regulators of the reporting entities. The RBI KYC Master Directions were issued by the RBI under section 35A of the Banking Regulation Act 1949 (the BR Act) (which empowers the RBI to issue such general or specific directions ‘as it may deem fit’), as well as under the PML Rules. Section 35A of the BR Act, read with section 22, provides that if a banking company does not comply with a direction validly issued by the RBI, then the RBI has the power to revoke the banking licence of the banking company. Accordingly, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may be empowered to revoke the licence of the banking company. Similarly, sections 45K and 45L read with section 45 IA(6) of the Reserve Bank of India Act 1934 provide that if a non-banking finance company (NBFC) fails to comply with the provisions of a direction issued by the RBI, including, for instance, the RBI KYC Master Directions, the RBI is empowered to cancel the registration of the NBFC. Section 11B of the SEBI Act 1992, inter alia, empowers the SEBI to regulate the securities market by any measures as it thinks fit and to cancel the licence of an intermediary for non-compliance with the directions issued by the SEBI, including, for instance, the SEBI AML Guidelines.

2.8. Forfeiture

2.8.1. Describe any related asset freezing, forfeiture, disgorgement and victim compensation laws.

Provisional attachment The PML Act provides for the provisional attachment of any property that is the proceeds of crime, pending a final confirmation by the Adjudicating Authority under the PML Act. The term ‘property’ has been defined very broadly to mean any property or assets of every description, whether corporeal or incorporeal, movable or immovable and tangible or intangible, and it includes deeds and instruments evidencing title to, or interest in, such property or assets wherever located. Further, the term ‘property’ includes property of any kind used in the commission of an offence under the PML Act; or any scheduled offence. The amendment to the definition of ‘proceeds of crime’ under the PML Act by the Finance Act 2015 enables the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, the Finance Act 2018 amended the definition of ‘proceeds of crime’ such that such right of attachment also extends to property (equivalent to the proceeds of crime) held outside India. In terms of section 5 of the PML Act, if the ED, based on the materials in its possession, has reason to believe that a person is in possession of proceeds of crime and those proceeds are likely to be concealed, transferred or dealt with in any manner that may result in frustrating any proceedings relating to the confiscation of those proceeds, then the ED, by an order in writing, may provisionally attach such property for a period of 180 days from the date of the order or until a confirming order is passed by the Adjudicating Authority under section 8(2) of the PML Act, whichever is earlier. An order of provisional attachment can be made only after a report has been forwarded to a magistrate under section 173 of the CrPC in relation to a scheduled offence or a complaint has been filed before a magistrate for taking cognisance of the scheduled offence. The Finance Act 2018 has clarified that in computing the 180-day period for provisional attachment of the property, the period during which the proceedings are stayed by the relevant High Court is excluded, and a further period not exceeding 30 days from the date of order of vacation of the stay order is counted. The PML Act does not define or explain the term ‘reason to believe’. However, the construction of the phrase may be aided by the definition of the term in section 26 of the IPC, wherein it is provided that a person may have reason to believe something if there is sufficient cause to believe it, but not otherwise. The courts have held that ‘reason to believe’ does not mean a purely subjective satisfaction, and the belief must be held in good faith. It is open for the courts to examine the reasons for a belief and to ascertain whether these reasons are relevant and not extraneous to the matter in question. It has been held by the courts (albeit not in the context of the PML Act, but in the context of other statutes) that a mere doubt or suspicion cannot be a reason to believe. Following provisional attachment under section 5 of the PML Act, the ED, or an officer authorised in this regard, is required to forward the material in its possession along with the provisional attachment order in a sealed envelope to the Adjudicating Authority in accordance with the procedure prescribed in the Prevention of Money Laundering (the Manner of forwarding a Copy of the Order of Provisional Attachment of Property along with the Material, and Copy of the Reasons along with the Material in respect of Survey, to the Adjudicating Authority and its Period of Retention) Rules 2005. The PML Act specifically permits a person interested in the ‘enjoyment’ of immovable property to enjoy the immovable property that has been attached. In the judgment of B Rama Raju v Union of India (2011 164 CompCas 149(AP)), the Andhra Pradesh High Court held that for the purposes of attachment and confiscation (which are civil and economic consequences and not penal sanctions and are distinct from the process for prosecution under the PML Act) neither mens rea nor knowledge that a property has a lineage of criminality has been statutorily prescribed as a prerequisite. Therefore, even where a person has not been charged with the predicate offence or the offence of money laundering, the authorities may, nevertheless, attach (and confiscate) property in the possession of the person if the property constitutes the proceeds of crime.

2.9. Limitation periods on money laundering prosecutions

2.9.1. What are the limitation periods governing money laundering prosecutions?

The PML Act does not specifically provide for a limitation period in relation to the offence of money laundering. However, section 468 of the CrPC specifies the limitation periods of various categories of offences in India. Under section 468, for an offence punishable with imprisonment for a term greater than three years, there is no limitation period. The CrPC defines the term ‘offence’ to mean ‘any act or omission made punishable by any law for the time being in force’. Consequently, the offence of money laundering under the PML Act constitutes an ‘offence’ within the meaning of the CrPC. Given that the offence of money laundering is punishable with imprisonment from three to 10 years, in accordance with the provisions of section 468 of the CrPC, there is no limitation period for the offence of money laundering. Further, under section 468 of the CrPC, if two or more offences are being tried together, then the limitation period for each offence will be determined with reference to the offence that is punishable with the most severe punishment. Thus, if a person is prosecuted simultaneously for a scheduled offence punishable by imprisonment for a term of less than three years together with the offence of money laundering under the PML Act (which is punishable with imprisonment for three or more years), then even if the limitation period for the underlying scheduled offence may have expired when considered independently, the accused person may still be tried for the scheduled offence in light of section 468 of the CrPC, given that the limitation period in such a scenario for both offences would be determined based on the offence of money laundering and not the scheduled offence.

3.1. Enforcement and regulation

3.1.1. Which government entities enforce the AML regime and regulate covered institutions and persons in India? Do the AML rules provide for ongoing and periodic assessments of covered institutions and persons?

There are several government entities that are collectively responsible for different aspects of enforcement and regulation of the AML framework in India. The Financial Intelligence Unit (FIU) was set up by the government by way of an office memorandum on 18 November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions. The FIU is also responsible for coordinating and strengthening the efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. The FIU is an independent body reporting directly to the Economic Intelligence Council, headed by the Finance Minister. By way of an order dated 1 July 2005, the central government empowered the Directorate of Enforcement (ED) (which is under the administrative control of the Department of Revenue of the Ministry of Finance and the government for operational purposes) to exercise exclusive powers regarding the investigation and prosecution of cases under the Prevention of Money Laundering Act 2002 (the PML Act). In addition, section 54 of the PML Act provides that certain officers are empowered and required to assist authorities under the Act with enforcement. Given that the PML Act requires that the scheduled offence (ie, the offence under the Indian penal statutes set out in the Schedule to the PML Act) and the offence of money laundering are tried together, the investigative agencies responsible for prosecuting the scheduled offence have been mandated to assist the ED that is authorised to prosecute the offence of money laundering. Further, the Reserve Bank of India (RBI) regulates banks and financial institutions, including in relation to their obligations under the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), and the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016 (the RBI KYC Master Directions). Similarly, the Securities and Exchange Board of India (SEBI) regulates intermediaries registered with it, including in relation to their obligations under the PML Act, the PML Rules and the Master Circular on Guidelines on Anti-Money Laundering (AML) Standards/Combating Financing of Terrorism (CFT)/Obligations of Intermediaries under the Prevention of Money Laundering Act 2002 and the rules framed thereunder (the SEBI AML Guidelines).

3.10. Limitation periods for AML enforcement

3.10.1. What are the limitation periods governing AML matters?

The PML Act does not specifically provide for a limitation period in relation to the offence of money laundering. However, section 468 of the CrPC specifies the limitation periods of various categories of offences in India. Under section 468, for an offence punishable with imprisonment for a term greater than three years, there is no limitation period. The CrPC defines the term ‘offence’ to mean ‘any act or omission made punishable by any law for the time being in force’. Consequently, the offence of money laundering under the PML Act constitutes an ‘offence’ within the meaning of the CrPC. Given that the offence of money laundering is punishable with imprisonment from three to 10 years, in accordance with the provisions of section 468 of the CrPC, there is no limitation period for the offence of money laundering. Further, under section 468 of the CrPC, if two or more offences are being tried together, then the limitation period for each offence will be determined with reference to the offence that is punishable with the most severe punishment. Thus, if a person is prosecuted simultaneously for a scheduled offence punishable by imprisonment for a term of less than three years together with the offence of money laundering under the PML Act (which is punishable with imprisonment for three or more years), then even if the limitation period for the underlying scheduled offence may have expired when considered independently, the accused person may still be tried for the scheduled offence in light of section 468 of the CrPC, given that the limitation period in such a scenario for both offences would be determined based on the offence of money laundering and not the scheduled offence.

3.11. Extraterritoriality

3.11.1. Do India’s AML laws have extraterritorial reach?

The PML Act applies to the whole of India; however, its application is not restricted to property situated in India. The term ‘property’ is defined under the PML Act to include any property or assets, wherever located, so long as it is derived from, arises out of or is related to any of the scheduled offences. The amendment to the definition of ‘proceeds of crime’ under the PML Act, by the Finance Act 2015, enables the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, the Finance Act 2018 has amended the definition of ‘proceeds of crime’ such that this right of attachment also extends to property (equivalent to the proceeds of crime) held outside India. To give effect to this limited extraterritorial application in the context of certain specified offences that may be committed abroad (which also constitute scheduled offences if committed in India) but the proceeds of which may have been remitted to India, or where the scheduled offence may have been committed in India but the proceeds of the crime are remitted abroad, section 56 of the PML Act empowers the central government to enter into reciprocal arrangements with the government of any country outside India for enforcing the provisions of the PML Act and for the exchange of information for the prevention of any offence under the PML Act or under the corresponding law in force in that country, or for investigation under the PML Act. On 1 August 2018, the government notified the Fugitive Economic Offenders Act 2018 (the Economic Offenders Act), effective retrospectively from 21 April 2018, to deter fugitive economic offenders from evading the process of law by staying outside the jurisdiction of Indian courts. For operationalising the Economic Offenders Act, the Fugitive Economic Offenders (Procedure for Conducting Search and Seizure) Rules 2018 have also been notified with effect from 24 August 2018. Some of the key provisions of the Economic Offenders Act are set out below:

  • a ‘fugitive economic offender’ is defined as an individual against whom an arrest warrant has been issued for committing any prescribed offence (where the value exceeds 1 billion rupees), and has left the country to avoid facing prosecution or has refused to return to face prosecution;
  • if any person against whom an application has been filed fails to appear (in person or through counsel) after a notice issued by the special court, then the person may be declared a ‘fugitive economic offender’;
  • any property of the fugitive economic offender can be attached for 180 days unless further extended by the special court. The properties will be released if the person is not found to be a fugitive economic offender at the conclusion of proceedings; and
  • the special court is entitled to confiscate properties, free of encumbrances, of any person declared as a ‘fugitive economic offender’ that are proceeds of a crime in India or abroad, benami properties in India or abroad or any other property in India or abroad. However, the special court is empowered to exempt from confiscation, any property in which a third party has a bona fide interest, without knowledge of the fact that the property is a proceed of crime.

The PML Act also contemplates ‘offences of cross-border implications’, which are:

  • offences committed or related to conduct outside India that constitute an offence in that jurisdiction and are scheduled offences under the PML Act, and a part of or all the proceeds of crime arising from such conduct are remitted to India; or
  • scheduled offences committed in India, and part of or all the proceeds of crime have been transferred or have been attempted to be transferred from India to a place outside India.

Offences with cross-border implications are scheduled offences under the PML Act and, accordingly, the PML Act may be applicable to those offences. In addition to this, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 (the Black Money Act) provided for a three-month window from 1 July 2015 to 30 September 2015 within which a person could make a declaration in respect of his or her undisclosed assets located outside India, and pay the prescribed rate of tax and penalty on those foreign assets on or before 31 December 2015, failing which those individuals would be subject to all the provisions of the Black Money Act, including penalties and prosecutions. The offence of wilful attempt to evade tax under section 51 of the Black Money Act has also been included in the list of scheduled offences under the PML Act, and accordingly, the PML Act may be applicable to those offences. Further, the UN Security Council Resolution 1373 obliges countries to freeze without delay the funds or other assets of:

  1. persons who commit, or attempt to commit, terrorist acts, or participate in or facilitate the commission of terrorist acts;
  2. entities owned or controlled directly or indirectly by (1); and
  3. persons and entities acting on behalf of, or at the direction of, (1) or (2), including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by those persons and associated persons and entities.

Each country has the authority to designate the persons and entities that should have their funds or other assets frozen. Additionally, to ensure that effective cooperation is developed among countries, countries should examine and give effect to, if appropriate, the actions initiated under the freezing mechanisms of other countries. To give effect to the requests of foreign countries under UN Security Council Resolution 1373, the Ministry of External Affairs will examine the requests made by foreign countries and forward it electronically, with their comments, to a designated officer for the freezing of funds or other assets. Freezing orders take place without prior notice to the designated persons involved.

3.2. Covered institutions and persons

3.2.1. Which institutions and persons must have AML measures in place?

Reporting entities, namely banks, financial institutions, intermediaries, and designated persons, are required to carry out certain anti-money laundering measures, including customer identification, client due diligence (CDD), customer acceptance, and tracking and reporting of certain types of transactions. The terms ‘financial institutions’, ‘intermediaries’ and ‘designated persons’ have wide definitions under the PML Act. Financial institutions have been defined as companies, corporations or cooperative societies carrying out the activities prescribed under section 45I of the Reserve Bank of India Act 1934 (the RBI Act) and include chit fund companies, housing finance institutions, authorised persons, payment system operators, non-banking financial companies and the Department of Posts. Intermediaries have been defined as:

  • stockbrokers, share transfer agents, merchant bankers, underwriters, investment advisers or other institutions registered as intermediaries with SEBI under section 12 of the SEBI Act 1992 (the SEBI Act);
  • associations registered or recognised under the Forward Contracts (Regulation) Act 1952;
  • institutions registered with the Pension Fund Regulatory and Development Authority as intermediaries; and
  • recognised stock exchanges.

Designated persons include, among others, the following:

  • person carrying out activities for playing games of chance for cash or kind, including such activities associated with casinos;
  • registrars who record transactions relating to immovable property, as may be notified by the central government;
  • real estate agents (ie, persons engaged in providing services in relation to sale or purchase of real estate) having an annual turnover of 2 million rupees or above;
  • dealers in precious metals and precious stones – if they engage in any cash transactions with a customer equal to or above 1 million rupees, carried out in a single operation or in several operations that appear to be linked; and
  • persons engaged in the safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the central government.

 

3.3. Compliance

3.3.1. Do the AML laws applicable in India require covered institutions and persons to implement AML compliance programmes? What are the required elements of such programmes?

Pursuant to the PML Act and the PML Rules, reporting entities are required to appoint a principal officer who is responsible for supplying information specified under the PML Rules to the office of the director of the FIU, and a designated director who is responsible for ensuring compliance with the obligations cast on the reporting entity under Chapter IV of the PML Act and the PML Rules. Names, designations and addresses (including email addresses) of the principal officer and the designated director, including any changes therein, must be intimated to the office of the director of the FIU. The designated director is required to be of a sufficiently senior position and able to discharge the functions with independence and authority. Further, every SEBI-registered intermediary should ensure that a proper policy framework required by the SEBI AML Guidelines is put into place. Financial institutions (and other entities regulated by the RBI are required to have a know your customer policy (KYC policy) duly approved by the board of directors of the entity or any committee of the board to which such power has been delegated. The KYC policy must include the following four key elements, namely a customer acceptance policy, risk management parameters, customer identification procedures and monitoring of transactions. These regulated entities are now mandated to carry out ‘money laundering (ML) and terrorist financing (TF) risk assessment’ exercises periodically to identify, assess and take effective measures to mitigate their money laundering and terrorist financing risk for clients, countries or geographic areas, products, services, transactions or delivery channels. Regulated entities are further required to apply a risk-based approach for the mitigation and management of identified risks and should have policies, controls and procedures in this regard, approved by their board of directors. Record-keeping and reporting are integral elements of the compliance programme. Further, as part of such compliance requirements, reporting entities and their directors, officers and employees (permanent and temporary) are prohibited from disclosing (tipping off) to their client the fact that a suspicious transaction report or related information is being reported or provided to the FIU.

3.4. Breach of AML requirements

3.4.1. What constitutes breach of AML duties imposed by the law?

The following constitute a breach of AML duties imposed by law:

  • acting in breach of section 3 of the PML Act by way of direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or having actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such proceeds of crime as untainted property; or
  • reporting entities acting in breach of the various compliance requirements imposed on them under Chapter IV of the PML Act, the PML Rules or specific guidelines and regulations issued by the RBI KYC Master Directions and the SEBI AML Guidelines.

 

3.5. Customer and business partner due diligence

3.5.1. Describe due diligence requirements in India’s AML regime.

The PML Rules require that every reporting entity:

  • at the time of commencement of an account-based relationship, verify the client’s identity as well as its beneficial owners (if the client is acting on behalf of a beneficial owner) and obtain information on the purpose and intended nature of the business relationship; and
  • in all other cases, verify the client’s identity while carrying out:
    • transactions of an amount equal to or exceeding 50,000 rupees, whether conducted as a single transaction or several transactions that appear to be connected; or
    • any international money transfer operations.

However, irrespective of the amount deposited, invested or transacted by clients, no minimum threshold or exemption is available from obtaining the minimum information or documents from clients as stipulated in the PML Rules regarding the verification of the records of the identity of clients. Further, no exemption from carrying out CDD exists in respect of any category of clients. In other words, there is no minimum investment threshold or category exemption available for carrying out CDD measures by registered intermediaries. The PML Rules require an intermediary to obtain certain minimum documentation from a client to verify the client’s identity. The nature of the documentation that is required to be obtained is in turn dependent on the nature of the client. In the past, individuals were required to submit certified copies of an officially valid document while opening a bank account; however, pursuant to an amendment to the PML Rules in 2017, it was made mandatory for Indian-resident individuals to provide their Aadhaar number (a 12-digit unique identification number) issued by the Unique Identification Authority of India (UIDAI) for opening bank accounts and for transactions exceeding 50,000 rupees. The provisions of the PML Rules provided that bank accounts that were not linked by 31 March 2018 were to be frozen, and no new accounts were to be opened without the submission of an Aadhaar number after this date. However, the constitutional validity of the Aadhaar regime was challenged before the Supreme Court (the apex judicial authority in India), and although the constitutional validity of the Aadhaar regime was upheld, certain provisions were read down, including the aforementioned provisions in relation to the Aadhaar number being mandatory for opening or operating bank accounts. Corresponding changes in other legislation (including the PML Rules) were subsequently brought about, prescribing that the linking of the Aadhaar number to bank accounts is voluntary. Currently, the following documents must be obtained by a reporting entity for opening an individual client’s account: the client’s Aadhaar number, or proof of possession of an Aadhaar number (for carrying out offline verification), or any officially valid document containing details of his or her identity and address; his or her permanent account number; and other documents in respect of the nature of the business and financial status of the client as may be required. The RBI also mandates similar KYC norms for banks, requiring regular monitoring of transactions and periodical updates of the customer identification data for high-risk individuals every two years. Beneficial ownership A client has been defined as a person who engages in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person engaged in the transaction or activity is acting. The PML Act has been amended to define the term ‘beneficial owner’ as an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person. Therefore, an obligation is cast upon the reporting entities to ensure that the entities know the ‘true identity’ of each and every client. However, where a client is subscribing or dealing with depository receipts or equity shares, issued or listed in jurisdictions notified by the Indian government, of a company incorporated in India, and it is acting on behalf of a beneficial owner who is a resident of such jurisdiction, the determination, identification and verification of such beneficial owner, will be governed by the norms of such jurisdiction.

3.6. High-risk categories of customers, business partners and transactions

3.6.1. Do the AML rules applicable in India require that covered institutions and persons conduct risk-based analyses? Which high-risk categories are specified?

The RBI KYC Master Directions and the SEBI AML Guidelines provide for certain parameters of risk perception to be defined in terms of the nature of business activity, location of clients, mode of payments, volume of turnover, social and financial status, and so on, to enable the categorisation of customers into low, medium and high risk. Customers requiring a very high level of monitoring (eg, politically exposed persons (PEPs)) may, if considered necessary, be categorised even higher. Banks, financial institutions and financial intermediaries must put in place documentation requirements in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of the PML Act. The nature and extent of CDD depends on the risk perceived by the bank, and the information sought from a customer must be relevant to the risk category and should not be intrusive. For the purpose of risk categorisation, individuals (other than high net worth individuals) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Banks must apply enhanced CDD for high-risk customers, especially those for whom the sources of funds are not clear. Some instances of high-risk customers requiring enhanced due diligence include:

  • non-resident customers;
  • high net worth individuals;
  • trusts, charities, non-governmental organisations (NGOs), non-profit organisations (NPOs) and organisations receiving donations;
  • companies having close family shareholding or beneficial ownership;
  • firms with ‘sleeping partners’;
  • PEPs of foreign origin, customers who are close relatives of PEPs and accounts of which a PEP is the ultimate beneficial owner; and
  • non-face-to-face customers and those with dubious reputations as per public information available.

However, NPOs and NGOs promoted by the United Nations or its agencies may be classified as low-risk customers. Banks and other regulated entities are mandated to carry out ‘money laundering (ML) and terrorist financing (TF) risk assessment’ exercises periodically to identify, assess and take effective measures to mitigate their money laundering and terrorist financing risk for clients, countries or geographic areas, products, services, transactions or delivery channels. The risk assessment process should consider all the relevant risk factors before determining the level of overall risk and the appropriate level and type of mitigation to be applied. The risk assessment by regulated entities must be properly documented and should be proportionate to the nature, size, geographical presence and complexity of the activities or structure of the regulated entity. Further, the periodicity of the risk assessment exercise must be determined by the board of directors of the entity, in line with the outcome of the risk assessment exercise. However, it should be reviewed at least annually. The outcome of the risk assessment exercise must be put up to the board of directors (or the relevant committee of the board) of the entity and should be made available to competent authorities and self-regulating bodies, as required by them. Regulated entities must apply a risk-based approach for the mitigation and management of the identified risks and should have policies, controls and procedures, approved by their board of directors, in this regard. Banks and non-banking financial companies (NBFCs) are required to have policies, controls and procedures in place to effectively manage and mitigate their risk adopting a risk-based approach as discussed above. In this regard, the Indian Banks’ Association (IBA) has taken initiative in assessing the money laundering and terrorist financing risk in the banking sector and has prepared a guidance note on KYC norms and AML standards in July 2009. The IBA guidance also provides an indicative list of high-risk customers, products, services and geographies. The RBI has clarified that banks and NBFCs may use the same guidance in their own risk assessments.

3.7. Record-keeping and reporting requirements

3.7.1. Describe the record-keeping and reporting requirements for covered institutions and persons.

Pursuant to the PML Rules, every reporting entity is required to maintain a record of all transactions, including a record of:

  • all cash transactions where the value is more than 1 million rupees or its equivalent in foreign currency;
  • all series of cash transactions that are integrally connected to each other and that have been valued below 1 million rupees or its equivalent in foreign currency, where the series of transactions have taken place within a month and the aggregate value of the transactions exceeds 1 million rupees or its equivalent in foreign currency;
  • all transactions involving receipts by NPOs of a value of over 1 million rupees or its equivalent in foreign currency;
  • all cash transactions where counterfeit currency notes or bank notes have been used as genuine currency or where any forgery of a valuable security or a document has taken place facilitating the transactions; and
  • all ‘suspicious transactions’; in other words, transactions, including attempted transactions, regardless of whether these are made in cash, that to a person acting in good faith:
    • gives rise to reasonable grounds of suspicion that it may involve proceeds of a scheduled offence, regardless of the value involved;
    • appears to be made in circumstances of unusual or unjustified complexity;
    • appears to have no economic rationale or bona fide purpose; or
    • gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism, regardless of whether it is in cash, made by way of:
      • deposits and credits, withdrawals into or from any accounts by way of cheques, travellers cheques or transfers from one account to another within the same reporting entity and any other mode in whatever name it is referred to;
      • credits or debits into or from any non-monetary accounts, such as demat accounts or security accounts, in any currency, maintained with the reporting entity;
      • money transfers or remittances in favour of clients or non-clients from India or abroad and to third-party beneficiaries in India or abroad, including transactions on its own account in any currency by any mode of money transfer;
      • loans and advances including credit or loan substitutes, investments and contingent liability by way of subscription to debt instruments such as: commercial papers, certificates of deposit, preferential shares, debentures, securitised participation, interbank participation or any other investments in securities; purchase and negotiation of bills, cheques and other instruments; foreign exchange contracts, currency, interest rate and commodity and any other derivatives; or letters of credit, standby letters of credit, guarantees, comfort letters, solvency certificates or any other instrument for settlement or credit support;
      • collection services in any currency by way of the collection of bills, cheques, instruments or any other mode of collection;
      • all cross-border wire transfers of the value of more than 500,000 rupees or its equivalent in foreign currency where either the origin or destination of the funds is in India; or
      • all purchases and sales by any person of immovable property valued at 5 million rupees or more that is registered by the reporting entity, as the case may be.

For the purpose of reporting suspicious transactions, apart from ‘transactions integrally connected’, ‘transactions remotely connected or related’ must also be considered. The records required to be maintained with respect to a transaction must contain all the necessary information specified by the regulator of the regulated entity to permit reconstruction of individual transactions, including the following information:

  • the nature of the transaction;
  • the amount of the transaction and the currency in which it was denominated;
  • the date on which the transaction was conducted; and
  • the parties to the transaction.

The records are required to be maintained using the procedure and in the manner specified by the PML Rules. Every reporting entity must maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for prosecution of criminal behaviour. Should there be any suspected drug-related or other laundered money or terrorist property, the competent investigating authorities may need to go through the audit trail to reconstruct a financial profile of the suspect account. To enable this reconstruction, registered intermediaries should retain the following information for the accounts of their clients to maintain a satisfactory audit trail:

  • the beneficial owner of the account;
  • the volume of the funds flowing through the account; and
  • for selected transactions:
    • the origin of the funds;
    • the form in which the funds were offered or withdrawn (eg, cheques and demand drafts);
    • the identity of the person undertaking the transaction;
    • the destination of the funds; and
    • the form of instruction and authority.

Every reporting entity must ensure that all client and transaction records and information are made available on a timely basis to the competent investigating authorities. Where required by the investigating authority, they should retain certain records, such as client identification, account files and business correspondence for periods that may exceed those typically required under the relevant legislation, rules and regulations, including the Banking Regulation Act 1949, the RBI Act, the SEBI Act, the rules and regulations framed under each of these and the PML Act. The principal officer is under an obligation to supply information relating to suspicious transactions to the office of the director of the FIU no later than seven working days on being satisfied that the transaction is suspicious. Reporting entities should not put any restrictions on operations on the accounts where a suspicious transaction report has been made. The principal officer must supply information in respect of cash transaction (individual or connected) of a value of more than 1 million rupees, receipts by NPOs of more than 1 million rupees, counterfeit currency transactions and cross-border wire transfers of a value of more than 500,000 rupees every month to the office of the director of the FIU by the 15th day of the following month. Further, the principal officer must supply information relating to transactions in immovable property valued at more than 5 million rupees every quarter to the office of the director of FIU by the 15th day of the month following the quarter (ie, April, July, October or January). Pursuant to the RBI KYC Master Directions and the SEBI AML Guidelines, the background, including all documents, office records, memoranda and clarifications, sought pertaining to transactions that are deviant from the client’s normal activity and purpose thereof must also be examined, and findings should be recorded in writing. Further, those findings, records and related documents should be made available to auditors as well as to the RBI, the SEBI, the FIU and other relevant authorities during audit, inspection or as and when required. These records must be preserved for a period of at least five years. In addition to the above, pursuant to an amendment to the PML Rules, linking of a client’s Aadhaar number to bank accounts was made mandatory for Indian-resident individuals, and existing bank account holders had to furnish the Aadhaar number issued by the UIDAI by 31 March 2018, failing which the accounts were to cease to be operational. However, this requirement has been discarded, and the requirement to link Aadhaar numbers to bank accounts is now voluntary. Reporting of suspicious transactions Any suspicious transaction (in the form of a detailed report that includes details of clients, transactions and the nature or reason of suspicion) must immediately be notified to the designated officer within the reporting entity. The principal officer and other related staff members are required to have timely access to client identification data and CDD information, transaction records and other relevant information. To ensure that the registered intermediaries properly discharge their legal obligations to report suspicious transactions to the authorities, the principal officer acts as a central reference point in facilitating the reporting of suspicious transactions and for playing an active role in the identification and assessment of potentially suspicious transactions, and has access to and is able to report to senior management at the next reporting level or the board of directors. UN designated list Pursuant to a circular dated 23 October 2009, all banks, financial institutions and intermediaries are required to maintain an updated list of designated persons who are subject to United Nations sanctions measures and run a periodic check based on certain parameters to identify whether those persons have any transactions with the intermediary. If, pursuant to the check, a client’s details match with the United Nations’ designated persons list, the intermediary is required to inform the joint secretary (Internal Security 1 (IS-1) division) at the Ministry of Home Affairs, the Unlawful Activities (Prevention) Act (UAPA) Nodal Officer of the state where the account is held, the UAPA Nodal Officer of the SEBI and the office of the director of the FIU of the name and details of the client within 24 hours. If the details of the client match the details of a designated person beyond doubt, the bank, financial institution or intermediary is under an obligation to prevent the person from conducting financial transactions and to notify the joint secretary (IS-1 division) at the Ministry of Home Affairs. These transactions must also be included in the suspicious transaction reports submitted to the FIU in the prescribed format.

3.8. Privacy laws

3.8.1. Describe any privacy laws that affect record-keeping requirements, due diligence efforts and information sharing.

Under section 12 of the PML Act, every reporting entity is required to maintain certain records and disclose such information to the authorities under the PML Act. The Information Technology Act 2000 and the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules 2011 (the Sensitive Information Rules) impose certain data protection obligations on the collection, storage and transmission in electronic format of information that is considered to be ‘sensitive personal data or information’. Sensitive personal data or information has been defined in the Sensitive Information Rules as ‘personal information’ (ie, any information relating to a natural person that, in combination with information available or likely to be available with an entity, is capable of identifying the person) that comprises:

  • passwords;
  • financial information, such as bank account, debit or credit card details;
  • an individual’s physical, psychological and mental health condition;
  • an individual’s sexual orientation;
  • medical records and history;
  • biometric information;
  • any details relating to the above as provided to the body corporate for providing a service; and
  • any information received relating to the above by the body corporate for processing or that is to be stored or processed under a lawful contract or otherwise.

The Sensitive Information Rules lay down practices and procedures that must be followed when collecting, storing and transferring sensitive personal data or information. The Sensitive Information Rules prohibit the sharing of sensitive personal data or information unless the person to whom the data or information pertains (the data subject) has consented in writing to the sharing of the information, or the sharing of the information is necessary for the performance of the contract between the data subject and the body corporate that seeks to share the information. The Sensitive Information Rules, however, expressly permit the disclosure of sensitive personal data or information:

  • to the extent necessary to comply with legal obligations;
  • where a government agency that is mandated under law to obtain the information makes a request in writing for the information; and
  • pursuant to any order passed under law that is in force.

Accordingly, the storing and disclosure of information in terms of the PML Act should not be in violation of the Sensitive Information Rules. In addition, section 14 of the PML Act also provides that no civil or criminal proceedings may be initiated against a reporting entity for divulging records of transactions to the enforcement authorities under the PML Act in accordance with the provisions of section 12 of the PML Act. An entity that collects, possesses or handles the ‘personal information’ or ‘sensitive personal data or information’ of the provider of the information is required to maintain a privacy policy for handling such information and must ensure that the privacy policy is available to the providers of the information in accordance with Rule 4 of the Sensitive Information Rules. The privacy policy must also be published on the website of the entity or any person on its behalf. The privacy policy must stipulate, inter alia, the type of ‘personal information’ or ‘sensitive personal data or information’ collected, the purpose and usage of the information, the details regarding disclosure of the information to third parties and the reasonable security practices and procedures followed by the body corporate to safeguard the ‘personal information’. The Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act 2016 (the Aadhaar Act), being the principal statute that governs the Aadhaar regime provides, inter alia, that a requesting entity is required to obtain the consent of an individual before collecting his or her identity information for the purposes of authentication in the manner prescribed, and to ensure that all the information is used only for submission to the Central Identities Data Repository for authentication. No identity information available with a requesting entity is permitted to be used for any purpose other than that specified to the individual at the time of submitting any identity information for authentication, or disclosed further, except with the prior consent of the individual to whom the information is related. The regulations also impose specific obligations and responsibilities on a requesting entity that uses the authentication and e-KYC facilities of the UIDAI, such as not sharing the data with any further entity and maintaining auditable logs of transactions where the e-KYC has been shared with other agencies. The Aadhaar (Authentication) Regulations 2016 (the Authentication Regulations) also provide for, inter alia, the obligation to maintain logs of the authentication transactions processed by it, containing prescribed details, and also grant the UIDAI with audit rights in relation to a requesting entity’s operations, infrastructure, systems and procedures in relation to compliance with the Aadhaar Act and the regulations formulated thereunder. Regulation 17 of the Authentication Regulations also provide, inter alia, that a requesting entity must ensure that:

  • the core biometric information collected from the Aadhaar number holder is not stored, shared or published for any purpose whatsoever, and no copy of the core biometric information is retained with it, and the core biometric information is not transmitted over a network without the prescribed information technology security measures;
  • identity information received during authentication is used only for the purpose specified to the Aadhaar number holder at the time of authentication and must not be disclosed further, except with the prior consent of the Aadhaar number holder to whom the information relates;
  • the identity information of the Aadhaar number holder collected during authentication and any other information generated during the authentication process is kept confidential, secure and protected against access, use and disclosure not permitted under the Aadhaar Act and its regulations; and
  • all relevant laws and regulations in relation to data storage and data protection relating to the Aadhaar-based identity information in its systems, that of its agents (if applicable) and with authentication devices are complied with.

 

3.9. Resolutions and sanctions

3.9.1. What is the range of outcomes in AML controversies? What are the possible sanctions for breach of AML laws?

An offence of money laundering is punishable by imprisonment for a term of between three years and seven years and, additionally, a fine. The maximum term of imprisonment may extend to 10 years if the proceeds of crime relate to an offence under the Narcotic Drugs and Psychotropic Substance Act 1985 (the NDPS Act) (which deals with crimes relating to narcotics). Plea bargaining is available in terms of the Code of Criminal Procedure 1973 (CrPC), although not for:

  • offences that have been notified by the government as affecting the ‘socio-economic condition of the country’; or
  • offences where the punishment prescribed by law is:
    • death;
    • life imprisonment; or
    • imprisonment for a term in excess of seven years.

The offence of money laundering has not yet been notified as affecting the ‘socio-economic condition of the country’ and is, accordingly, not precluded from being eligible for plea bargaining. Further, given that the maximum punishment is seven years’ imprisonment (except in the case of proceeds of crime arising out of an offence under the NDPS Act), plea bargaining should be available for the offence of money laundering. In this regard, if the courts in India consider the PML Act as a socio-economic statute such as the corruption laws and other statutes, then plea bargaining may not be available. The process for plea bargaining involves the accused making an application to the court and, upon the court being satisfied that the application was made voluntarily, making an order for the accused to work out a mutually satisfactory disposition of the case that may include the accused giving to the victim the compensation and other expenses during the case and thereafter. Under the PML Act, fines ranging from 10,000 rupees to 100,000 rupees for each failure can be imposed on a reporting entity if it has failed to maintain records or supply information in the manner prescribed under the PML Act and the PML Rules. In addition, although the PML Act and PML Rules do not provide for the revocation of licences of reporting entities, this may be possible based on the circulars relating to KYC and AML, issued by the regulators of the reporting entities. The RBI KYC Master Directions were issued by the RBI under section 35A of the Banking Regulation Act 1949 (the BR Act) (which empowers the RBI to issue such general or specific directions ‘as it may deem fit’), as well as under the PML Rules. Section 35A of the BR Act, read with section 22, provides that if a banking company does not comply with a direction validly issued by the RBI, then the RBI has the power to revoke the banking licence of the banking company. Accordingly, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may be empowered to revoke the licence of the banking company. Similarly, sections 45K and 45L read with section 45 IA(6) of the Reserve Bank of India Act 1934 provide that if an NBFC fails to comply with the provisions of a direction issued by the RBI, including, for instance, the RBI KYC Master Directions, the RBI is empowered to cancel the registration of the NBFC. Section 11B of the SEBI Act, inter alia, empowers the SEBI to regulate the securities market by any measures as it thinks fit and to cancel the licence of an intermediary for non-compliance with the directions issued by the SEBI, including, for instance, the SEBI AML Guidelines.

4.1. Procedure

4.1.1. Enumerate and describe the required elements of a civil claim or private right of action against money launderers and covered institutions and persons in breach of AML laws.

The Prevention of Money Laundering Act 2002 (the PML Act) is a criminal statute, and civil claims and private rights of action have not been contemplated therein.

4.2. Damages

4.2.1. How are damages calculated?

The PML Act does not create a private right of action, and, therefore, damages are not recoverable in a civil claim for a breach of AML laws.

4.3. Other remedies

4.3.1. What other remedies may be awarded to successful claimants?

Not applicable.

5.1. Supranational

5.1.1. List India’s memberships of supranational organisations that address money laundering.

India is a member of the Financial Action Task Force (FATF), the Eurasian Group on anti-money laundering and combating the financing of terrorism and the Asia/Pacific Group on Money Laundering. Further to the Multilateral Competent Authority Agreement on the automatic exchange of financial account information, joined by India on 3 June 2015, and for the purpose of implementing the Foreign Account Tax Compliance Act (FATCA) introduced by the US government in 2010, the Indian government and the US government entered into an intergovernmental agreement on 9 July 2015 (India IGA) to improve international tax compliance and provide for the implementation of the FATCA based on domestic reporting and reciprocal automatic exchange. In terms of the FATCA read with the India IGA, Indian financial institutions are required to identify, establish and report information on financial accounts held directly or indirectly by US persons. In this regard, the Ministry of Finance has, by way of a notification dated 7 August 2015, amended the Income-tax Rules 1962 (the IT Rules) to include rules setting out the information to be maintained and reported, as well as the due diligence requirements. A ‘reportable account’ under the IT Rules means a financial account that has been identified, pursuant to the due diligence procedures provided in the IT Rules in this regard, as being held by:

  • one or more specified US persons (ie, a resident or citizen of the United States (or the estate of such a decedent); a partnership or corporate organised in the United States or under US law; or a trust controlled by citizens or residents of the United States or subjected to the authority of the US courts) or one or more persons other than:
    1. a corporation, the stock of which is regularly traded on one or more established securities markets, or a related corporation;
    2. a government entity; or
    3. an international organisation, a central bank or a financial institution that is a resident of any country or territory outside India (except the United States) under the tax laws of such country or territory, or an estate of a decedent who was a resident of any country or territory outside India (except the United States) under the tax laws of such country or territory;
  • a passive non-financial entity with one or more controlling persons that is a person described in (1) to (3); or
  • an entity, not based in the United States, with one or more controlling persons that is a specified US person.

The amendment to the IT Rules has been followed by the issuance of circulars and notifications from various authorities, such as the Securities and Exchange Board of India, the Reserve Bank of India and the Central Board of Direct Taxes, relating to steps to be taken by entities regulated by such regulators for ensuring compliance with the requirements specified in the IT Rules, after carrying out the necessary due diligence. 

5.2. Anti-money laundering assessments

5.2.1. Give details of any assessments of India’s money laundering regime conducted by virtue of your membership of supranational organisations.

India’s mutual evaluation was last completed on 25 June 2010. The conclusion was that India has several mechanisms in place for domestic coordination and cooperation at both the policy and operational levels to identify new and emerging trends and to formulate appropriate responses. India has progressively expanded and strengthened its preventive measures for the financial sector, which now apply to all but one of the financial activities required to be covered under the FATF standards; however, several preventive provisions need to be brought more closely into line with the FATF standards, and, overall, more time is needed before all requirements are substantially implemented. The key recommendations made to India in the mutual assessment included the need to:

  • address the technical shortcomings in the criminalisation of both money laundering and terrorist financing and in the domestic framework of confiscation and provisional measures;
  • broaden the client due diligence obligations with clear and specific measures to enhance the current requirements regarding beneficial ownership;
  • improve the reliability of identification documents, the use of pooled accounts, politically exposed persons and non-face-to-face business;
  • ensure that India Post, which recently became subject to the Prevention of Money Laundering Act 2002 (the PML Act), effectively implements the anti-money laundering and combating the financing of terrorism (AML/CFT) requirements;
  • enhance the effectiveness of the suspicious transaction report reporting regime;
  • enhance the effectiveness of the financial sector supervisory regime and ensure that India Post is adequately supervised; and
  • ensure that the competent supervisory authorities make changes to their sanctioning regimes to allow for effective, proportionate and dissuasive sanctions for failures to comply with AML/CFT requirements.

The FATF, at the June 2013 plenary meeting, decided that India could be removed from the regular follow-up process as it had reached a satisfactory level of compliance with all the core and key recommendations. 

5.3. FIUs

5.3.1. Give details of India’s Financial Intelligence Unit (FIU).

The Financial Intelligence Unit – India (FIU-IND) has been a member of the Egmont Group, an international organisation for stimulating cooperation among FIUs, since May 2007. In accordance with its annual report 2017–18, as at 31 March 2018, the FIU-IND has signed bilateral memoranda of understanding (MOUs) with 39 countries, namely Australia, Bahrain, Bangladesh, Belarus, Bermuda, Brazil, Canada, Georgia, Guernsey, Fiji, Indonesia, Israel, Japan, Kazakhstan, Kyrgyz Republic, Macedonia, Malaysia, Mauritius, Montenegro, Myanmar, Nepal, Nigeria, the Philippines, Poland, Qatar, Russia, San Marino, Saudi Arabia, Singapore, Senegal, South Africa, Sri Lanka, Tajikistan, Thailand, Togo, the United States, Ukraine, Uzbekistan and Vatican City State. In addition, MOUs with more than 10 countries are under various stages of negotiation. The MOUs are to facilitate the exchange of intelligence between countries for the purpose of cooperation to gather, develop and analyse information concerning financial transactions suspected of being related to money laundering and terrorist financing. The contact details for FIU-IND are as follows. Financial Intelligence Unit – India, 6th Floor, Tower – 2, Jeevan Bharati Building, Connaught Place, New Delhi 110 001, India Telephone: +91 11 26874429, 26874349 (PABX) Office contacts:

  • helpdesk: 91-11- 23319793; and
  • for reporting entity or principal officer registration-related enquiries: +91 11 24672138.

Emails for:

  • general queries: helpdesk@fiuindia.gov.in;
  • queries relating to reporting entity or principal officer registration: ctrcell@fiuindia.gov.in; and
  • any complaints: complaints@fiuindia.gov.in.

Website: https://fiuindia.gov.in/ 

5.4. Mutual legal assistance

5.4.1. In which circumstances will India provide mutual legal assistance with respect to money laundering investigations? What are India’s policies and procedures with respect to requests from foreign countries for identifying, freezing and seizing assets?

The establishment of the commission of or apprehension for the offence of money laundering is a prerequisite for Indian authorities to seek information from a ‘contracting state’ under the PML Act or to take any steps to attach the assets of a person accused of money laundering (which may be located in a contracting state). Once this is established, Indian authorities then have to seek information by following the process set out in the reciprocal arrangement for the exchange of information between India and the contracting state, or the procedure detailed in sections 57, 59 and 60 of the PML Act. Section 56 of the PML Act empowers the Indian government to enter into reciprocal arrangements with the government of any country outside India for enforcing the provisions of the PML Act and the exchange of information for the prevention of any offence under the PML Act or under the corresponding law in force in that country. Section 57 of the PML Act provides that in the course of the investigation of an offence or other proceedings under the PML Act, the relevant investigating officer may make an application to a special court in India to issue a letter of request to the competent authorities in the contracting state to forward, inter alia, the relevant evidence to the special court. If the special court is satisfied that such evidence is required in connection with the investigation, the special court may issue a letter of request to the relevant contracting state. Section 59 of the PML Act provides that a special court may, in relation to an offence under the PML Act, issue a warrant or summons for execution to competent authorities in a contracting state requiring an accused person to, inter alia, allow searches, attend proceedings before the special court or produce documents before the special court. In addition, under section 60 of the PML Act, the special court under the PML Act may take necessary steps to attach or seize property involved in money laundering that is located or suspected to be located in a contracting state by issuing a letter of request to a court or authority in the contracting state if an offence corresponding with an offence under the Indian penal statutes set out in the Schedule to the PML Act has been committed in the contracting state. In terms of the PML Act, the power of the Indian government is limited to seeking information regarding a person accused of the commission of an offence under the PML Act and no other persons. For the purpose of implementing the FATCA introduced by the US government in 2010, the Indian government and the US government entered into the India IGA on 9 July 2015 to improve international tax compliance and provide for the implementation of the FATCA based on domestic reporting and reciprocal automatic exchange. In terms of the FATCA read with the India IGA, and the subsequent amendments to the IT Rules, Indian financial institutions are required to identify, establish and report information on financial accounts that are held directly or indirectly by US persons.

11.1. Key developments of the past year

11.1.1. Are there any other current developments or emerging trends that should be noted?

The warehousing sector has seen a sharp increase owing to the expanding delivery network of e-commerce companies in India, many of them concentrated in tier-two cities across the country. Press Note 3 of 17 April 2020 now requires all countries sharing land borders with India or beneficial owners of investors who share land borders with India, proposing to acquire a shareholding or invest in India, will require government approval.

11.2. Coronavirus

11.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

On 28 May 2020, the Ministry of Housing and Urban Affairs issued advice to various states, union territories and other central government ministries concerning the validity and time-limit extension of all approvals, no-objection certificates and subsequent compliances for the real-estate sector. According to the advisory, the states and the concerned agencies have been advised to:

  1. consider the situation as a force majeure;
  2. extend the validity automatically, of various kinds of approvals by urban local bodies and urban development authorities or other state agencies including the commencement and completion certificates, the payment schedule of charges, including developmental charges and no-objection certificates from various agencies by nine months; and
  3. automatically extend timelines for subsequent compliances by the building proponents, as per the precondition of the permission give, for nine months.

The advisory, as outlined in point (2) and (3) above, may be considered for all those projects whose validity has expired on or after 25 March 2020. The advisory further provides that the states may issue necessary directives to municipal corporations, urban development authorities and urban local bodies enabling various approvals, payment of charges and compliances by building proponents be rescheduled without an individual application from the building proponent. Given the above advisory, the real-estate regulatory authorities of several states have extended the registration of the real-estate project including completion timelines from six to nine months. The state of Maharashtra has reduced the amount of the stamp duty by 2 per cent on immovable-property conveyance instruments from 1 September 2020 to 31 December 2020, and by 1.5 per cent from 1 January 2021 to 31 March 2020. The Reserve Bank of India announced a resolution framework for covid-19 related stress on 6 August 2020, addressing borrower defaults under the stress caused by the pandemic – without necessitating a change of ownership and without an asset-classification downgrade, it modified the existing framework. The framework for covid-19 stress covers the resolution of both personal loan accounts and corporate loan accounts. The framework applies to commercial banks, primary cooperative banks, state cooperative banks, district-level cooperative banks, all India term financial institutions and all non-banking financial companies, including housing finance companies. Only those borrower accounts that were classified as standard, but not in default for more than 30 days with any lending institution as on 1 March 2020 and having stress because of covid-19, are eligible for resolution under this framework. On 24 September 2020, the Ministry of Corporate Affairs (MCA) extended the moratorium against the filing of applications for the commencement of corporate insolvency resolution processes against corporate debtors for any defaults arising after 25 March 2020 by a further three months to 25 December 2020. The moratorium, which came into effect in June, was originally announced for a period of six months (ie, from 25 March 2020 to 25 September 2020. The MCA is authorised to further extend the moratorium until 25 March 2021. 

5.1. Key developments of the past year

5.1.1. Are there any developments, emerging trends or hot topics in foreign investment review regulation in India? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?

As a step towards the liberlisation of foreign investment in India and towards giving an impetus to defence production, the central government, in Press Note 4 dated 17 September 2020, increased the foreign direct investment cap to 74 per cent from 49 per cent through the automatic route in the defence sector. The covid-19 pandemic has adversely affected most major economies, including the Indian economy. In light of the lockdowns and market disruptions caused by covid-19, the valuations of several Indian companies have witnessed a significant decline. To combat any opportunistic takeovers or acquisitions of Indian companies, the Ministry of Commerce, on 17 April 2020, issued Press Note 3 (2020 Series) to amend the extant foreign direct investment policy; and the related amendments to the Foreign Exchange Management (Non-debt Instruments) Rules 2019 were notified in the notification dated 22 April 2020 in exercise of the powers conferred by clauses (aa) and (ab) of subsection (2) of section 46  of  the  Foreign  Exchange  Management  Act  1999, which amended the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (Revised NDI Rules). Based on the Revised NDI Rules, any investing entity that belongs to or is incorporated in or that is beneficially owned by a citizen of or a person situated in a country sharing a land border with India (concerned investor) must obtain the Indian government’s approval prior to making any investment. Over the course of the past several years, the rules relating to foreign direct investment in India were progressively liberalised; however, investors from only two of India’s neighbouring countries – Pakistan and Bangladesh – have been subject to stricter investment rules (requiring all investments to be approved by the government). Investors from China were not subject to such strict scrutiny other than in sensitive sectors such as telecom, defence and railway infrastructure. With the amendment to the Foreign Exchange Management (Non-debt Instruments) Rules the following transactions will require prior government approval (even if the sector is an automatic route sector): any acquisition of a stake in an Indian entity by a concerned investor; or any transaction that will result in a concerned investor becoming a beneficial owner of an Indian entity. Prior government approval must also be obtained for any transfers of existing foreign investment, which would result in the concerned investor securing beneficial ownership of an Indian company. Further, to facilitate seamless investments in India during the pandemic, the Finance Ministry announced a slew of measures across several domains, including, inter alia, income tax filing, corporate affairs, the Insolvency and Bankruptcy Code 2016, the banking sector, and credit schemes to micro, small and medium-sized enterprises. For instance:

  • No additional fees were charged for late filing during a moratorium period from 1 April 2020 to 30 September 2020 in respect of any document etc, that was required to be filed with the Ministry of Corporate Affairs (MCA) registry, irrespective of its due date. This step contributed towards the reduction of compliance burden and enabled previous non-compliant companies and limited liability partnerships to make a fresh start.
  • The MCA, in a circular dated 24 March 2020, relaxed the regulations for companies conducting their annual general meeting (for the financial year ending 31 December 2019) (AGM) until 30 September 2020. Further, in a general order dated 8 September 2020, the MCA extended the timeline for conducting AGMs from 30 September 2020 to 31 December 2020.
  • The Reserve Bank of India, in a notification dated 27 March 2020, permitted all commercial banks (including regional rural banks, small finance banks and local area banks), cooperative banks, All India Financial Institutions, and non-banking financial companies (including housing finance companies and microfinance institutions) to allow a moratorium of three months on payments of equated monthly installments and installments in respect of all term loans outstanding as on 1 March 2020, which was further extended by another three months (until 31 August 2020).
  • The Supreme Court, in its order dated 23 March 2020 in WP (Civil) No. 3/2020 took suo motu cognisance of the difficulty faced by the litigants in approaching various courts and tribunals owing to the national lockdown and thereby extended the limitation period in all proceedings, irrespective of the limitation prescribed under the general law or special laws whether condonable, with effect from 15 March 2020 until further orders are passed by the Supreme Court.

In the wake of strict lockdowns in India owing to covid-19, to ensure regulatory continuity and progress new and pending cases, the Competition Commission of India (CCI) in a welcome move in 2020, issued a press release clarifying the procedure for the electronic filing of notification forms as well as online video consultations. Be it Form I/Form II combinations, green channel notifications or, even, combinations with remedies, it has been business as usual for the CCI’s combination division, which has conducted its review as seamlessly as possible with limited staff and work-from-home facilities. Additionally, in a welcome development, the CCI acknowledged the need for businesses to ‘join-hands’ to address the technical and economic challenges caused by covid-19 such as: disruptions in supply chains; the rationalisation of product ranges; the halting of pipeline products; and future supply concerns. In this regard, the CCI issued an advisory to businesses recognising the need of businesses (including those dealing in critical healthcare and essential commodities) to coordinate certain activities (including the formation of efficiency enhancing joint ventures). However, the advisory clarified that these activities shall be limited to: sharing data on stock levels; timings of operation; sharing of distribution networks and infrastructure; and transport logistics, research and development, production, etc. However, the CCI emphasised in the advisory that in its assessment of such coordinated activity, it will review factors such as accrual of benefits to consumers, improvement in production or the distribution and provision of goods and services, and economic development. This caveat clarifies that the CCI will only consider coordinated activity that is necessary and proportionate to address concerns arising from covid-19. The advisory further cautions that businesses taking advantage of covid-19 to contravene the provisions of the Competition Act 2002 will not be able to claim protection from the sanctions. On 27 March 2020, the CCI issued guidance (the Revised Notes) for parties to file a Form I and clarified the scope of information to be provided to the CCI while notifying a combination in Form I. The Revised Notes were essentially issued to incorporate the amendments introduced to Form I by CCI by way of gazette notification dated 13 August 2019. The Revised Notes: provide relaxation in mapping overlaps between the parties; provide relaxation in providing market facing information; and clarify the scope of ‘complementary’ products and services. It also requires an enhanced level of disclosure: from the acquirer with respect to its group activities; and on the details of the transaction, including the rights being acquired. The Revised Notes clarify: that market shares are to be provided for three years (as opposed to the earlier requirement of one year), only when the combined market shares of the parties for any plausible alternative relevant market exceeds 10 per cent; and the scope of complementary products and services. While mapping horizontal and vertical overlaps, parties are now required to consider entities in which they hold: a direct or indirect shareholding of 10 per cent or more; a right or an ability to exercise any right (including any advantage of commercial nature) that is not available to any ordinary shareholder; or a right or an ability to nominate a director or observer in another enterprise. Further, the CCI has also recently proposed to do away with the requirement for transacting parties to disclose (in Form I) and justify non-compete covenants as part of the combination. If this proposal is successful, then parties would be expected to conduct a self-assessment of non-compete covenants while making a notification in Form I. Moreover, the CCI will continue to have the power to conclude on the effects of these non-compete covenants through the provisions pertaining to anticompetitive agreements under the Competition Act 2002 (the Competition Act). While the CCI sought public comments on its recommendation, it is yet to implement this amendment. 

5.1. International and national regulation

5.1.1. Are there any emerging trends, international regulatory schemes, national government or regulatory changes, or other hot topics in real estate regulation in India? (eg, transition to a new alternative benchmark rate upon cessation of LIBOR as benchmark rate?)

The Supreme Court of India has upheld an amendment to the Insolvency and Bankruptcy Code 2016 whereby home buyers have been included in the definition of financial creditors. Home buyers being not less than 100 under the same real estate project or being not less than 10 per cent of the total numbers of home buyers in a real state project, whichever is lesser, can file an insolvency application for initiating the insolvency resolution process against a developer should the developer fail to keep the commitment made by the developer to the home buyers.

5.1. Proposals and developments

5.1.1. Are there any other current developments or trends that should be noted?

With the increasing sophistication of offences and the pressure on investigating agencies to find evidence, investigating agencies are also testing the boundaries of attorney-client privilege (and, in some instances, successfully so). As per media reports, a law firm was recently asked by investigating agencies to hand over documents on a fraud allegedly perpetrated by an individual who had left India, since the documents available with the law firm were not covered by attorney-client privilege. Similarly, in connection with the investigation into a failure of a large conglomerate with financial and other businesses, with the consent of the new management, investigating agencies sought details of past advice provided by multiple law firms to the past management.

5.1. Key developments of the past year

5.1.1. Please highlight any recent significant events or trends related to your national anti-corruption laws.

 

The key recent developments that related to Indian anti-corruption laws are as follows:

  • A criminal reforms committee has been constituted in an attempt to amend the Indian Penal Code. A set of questionnaires have been issued by this committee to gauge public opinion on various offences. One of these issues includes private bribery, which may be criminalised by way of amendment.
  • recent amendments to the Prevention of Money Laundering Act (PMLA), which expand the definition of proceeds of crime, remove the requirement to file a first information report for a scheduled offence as a prerequisite for the Enforcement Directorate to initiate proceedings under the PMLA and declare all offences under the PMLA as cognisable and non-bailable;
  • the former chairman of United Spirits Limited being declared as India’s first Fugitive Economic Offender under the Fugitive Economic Offenders Act 2018;
  • recent forensic investigation activity in relation to the affairs of the Amrapali directors, Moser Baer India Limited and Infosys Limited, based on alleged fraud and mismanagement in the affairs of the relevant entities;
  • the Securities and Exchange Board (SEBI)’s initiative to reward whistle-blowers for cases involving companies whose securities are listed on stock exchanges in India;
  • initiation of proceedings before the Supreme Court, which will ultimately decide the retroactive applicability of the PMLA to cases of fraud under section 447 of the 2013 Act that occurred prior to April 2018;
  • the ED’s prosecution against P Chidambram, HDIL and its promoters and Moser Baer India Limited and Ratul Puri, for allegations of money-laundering;
  • the prosecution by the Ministry of Corporate Affairs against the directors, management and the statutory auditors of Infrastructure Leasing and Financial Services. The auditors are presently being investigated by the National Financial Reporting Authority, with bans having been met out to the individuals directly involved in the audit;
  • proceedings before the Supreme Court of India in relation to the ban imposed by the SEBI against Pricewaterhouse Coopers for its alleged involvement in the fraud committed by the management of Satyam Computer Services Limited; and
  • proceedings initiated by the Serious Fraud Investigation Office (against the lenders and the promoters of Bhushan Steel alleging that the senior officials of 13 banks were involved in the bank fraud committed by the promoters against the relevant banks.

 

5.1. Update and trends

5.1.1. What are the principal challenges to developing cybersecurity regulations? How can companies help shape a favourable regulatory environment? How do you anticipate cybersecurity laws and policies will change over the next year in India?

Various factors have contributed to delayed formulation of cybersecurity regulations in India, including: (i) the rapid advancement of technology that continues to outpace regulatory response; (ii) intermittent and ineffective reporting of incidents; (iii) the private sector’s inability to accurately assess criticality of available information and likely harm that may be caused in the event of an incident; (iv) lack of cross-functional expertise on the nature of cyber security incidents that may be experienced by varied sectors; and (v) government and private sector hesitation to mandate minimum standards for all categories of businesses, in view of the time and expense involved. In the last year, however, there has been a renewed focus on adoption of robust cybersecurity practice in India, both from the government and the private sector. Due to the covid-19 pandemic and the large-scale remote work and new technology adoption resulting from it, the private sector has been quite vigilant in adapting its processing, updating its budgets and responding to cyber threats in a timely and nuanced manner. Several organisations, such as the Data Security Council of India (DSCI), have proactively issued advisories and assisted other private sector organisations to seamlessly transition to safer digital processes. We expect these initiatives to guide the government in terms of level of cyber security preparedness expected from organisations, how the private sector has responded to cyber security threats, renewed focus on revision of policies and diversified skill-set of response stakeholders, and testing efficacy of protective technologies and strategies. Timely and descriptive cyber security reporting by the private sector will bring in more collaboration and clarity on better practices. The varied experiences of regulated businesses regarding cyber incidents will help guide policy, as it is likely that sensitive sectors such as healthcare and social security will require a higher standard of compliance, in view of the nature of their operations and risk assessment. We expect some regulatory developments proposed by the government to further energise compliance. The National Cyber Security Strategy 2020 is a long-awaited policy initiative of the government, and it is hoped that better security standards and priority allocation will be the norm after it is notified. The Guidelines on Regulation of Payment Aggregators and Payment Gateways require payment aggregators to implement security standards, and best practices which will benefit the financial technology sector in India.

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has been implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

On 28 May 2020, the Government of India, Ministry of Housing and Urban Affairs, issued an advisory to various states, union territories and other ministries of central government with respect to the extension of validity and time limit of all approvals, No Objection Certificates (NOCs) and subsequent compliances for the real estate sector. As per the said advisory, the states and the concerned agencies have been advised to:

  • consider the situation as a force majeure;
  • extend the validity, automatically, of various kinds of approvals by Urban Local Bodies, Urban Development Authorities and other state agencies, including commencement and completion certificates, payment schedule of charges including developmental charges, NOCs from various agencies by nine months; and
  • extend the timelines for subsequent compliances by the building proponents as per the precondition of the permission given, automatically, for a period of nine months.

It has been clarified in the advisory that the advisory as set forth in the second and third points may be considered for all those projects whose validity has expired on or after 25 March 2020. The advisory further provides that the states may issue necessary directives to Municipal Corporations, Urban Development Authorities and Urban Local Bodies so that various approvals, payment of charges and compliances by building proponents may be rescheduled without any requirement of an individual application from the building proponent. In view of the above advisory, the Real Estate Regulatory Authorities of various states have extended the registration of real estate projects as well as completion timelines by a period ranging from six months to nine months. The state of Maharashtra has reduced the amount of stamp duty by 2 per cent on the instruments of conveyance of the immovable property for a period starting from 1 September 2020 to 31 December 2020, and by 1.5 per cent for the period starting from 1 January 2021 to 31 March 2020. The Reserve Bank of India announced a resolution framework for covid-19 related stress on 6 August 2020 to address borrower defaults pursuant to the stress caused by the pandemic – without necessitating a change of ownership and without asset classification downgrade, modifying the existing framework. The framework for covid-19 stress covers resolution of both personal loan accounts and corporate loan accounts. The framework is applicable to commercial banks, primary cooperative banks, state cooperative banks, district level cooperative banks, all Indian term financial institutions and all non-bank financial companies, including housing finance companies. Only those borrower accounts that were classified as standard, but not in default for more than 30 days with any lending institution on 1 March 2020 and having stress on account of covid-19 are eligible for resolution under this framework. 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

 

The central government and the state governments, during the covid-19 pandemic, issued orders under the National Disaster Management Act 2005 and the Epidemic Diseases Act 1897. The Epidemic Diseases Ordinance 2020 was promulgated on 22 April 2020 to empower the state governments to take special measures and prescribe regulations during the outbreak of an epidemic disease. These legislation were the primary sources of the government imposing the lockdown and rules surrounding it.

At the Union level, a relaxation on tax return filings was announced through the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020. There was a further relaxation on the tax deducted at source announced at the annual budget. The Central Board of Direct Taxes relaxed the reporting of information as well.

The Reserve Bank of India (RBI) started by imposing a three-month moratorium on loans, which was extended to 31 August 2020. However, there is still some uncertainty as the issue is sub-judice with the Supreme Court and the RBI has not issued fresh guidelines on the moratorium. However, the moratorium imposed against insolvency proceedings was extended up to 25 December 2020. Orders in this matter were reserved on 17 December 2020 and are still awaited.

Timelines for compliances have been extended by the Ministry of Corporate Affairs. These relaxations include conducting the annual general meeting of a company through video conferencing, and the date for the meeting had been extended to 31 December 2020. On the capital markets front, SEBI has extended the timeline for compliances on depository participants as well as trading members. This also includes measures to ease compliance such as permitting digital signature certificates for authentication of filings.

For good order, it is recommended that clients seek advice on the updated compliance requirements under various regulators. There have been continuous changes introduced by the government to address various issues caused by the pandemic. There has been a further review of some of these changes by the judiciary and the state governments.

A repository of resources tracking the changes introduced by the government to tackle the pandemic can be found here: https://www.azbpartners.com/covid-19/

 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The DSCI (which is an industry body set up by the National Association of Software and Service Companies, established for data protection in India, for the purposes of establishing standards and practices for cyberspace to make it safe and secure) issued a paper titled ‘Business Resiliency and Security during COVID-19’, which outlines how security organisations have handled the unprecedented challenges brought about by the pandemic and is a summation of best practices that may be adopted by organisations, going forward. The DSCI has also issued various advisories on the best practices for cyber security to be implemented by IT administrators and employees working from home, privacy implications arising from remote work and cybersecurity protocols to be adopted by hospitals and law enforcement agencies. Further, an advisory has also been issued by the Computer Emergency Response Team (CERT-In) to combat the covid-19 related phishing campaigns by malicious actors against individuals and businesses. Further, to combat cyber security issues, certain regulators such as the Department of Telecommunication have been issuing, inter alia, various security-related circulars to update stakeholders, such as: ‘Best Practices – Cyber Security‘, which provides protocols to be followed by organisations; and ‘Unsafe Practices to be Avoided at Workplace for Cyber Security‘, which describes unsafe workplace practices that should be avoided, such as using common passwords, leaving devices unlocked, ignoring operating systems and software updates, downloading files without scanning, etc. It is recommended for all organisations to, in a timely manner, appoint a chief information security officer, formulate policies and allocate stakeholder responsibility, and review the available advisories (especially in their particular sector). It is also advisable for organisations to adapt their cyber security preparedness in light of the degree of harm that can be caused to their business and stored information, in the event of an incident. The Reserve Bank of India (RBI), in its ‘Financial Stability Report’ issued in July 2020, recognised the banking industry as a ‘target of choice’ for cyberattacks. In the post-covid-19 lockdown, the number of cyberthreat incidents has considerably surged, in view of which the RBI has taken several measures to ensure the adoption of other practices and procedures. As per the ‘Financial Stability Report’ issued in July 2020, one such example is the advisory issued by the RBI on 13 March 2020 to the regulated entities to ensure that access to systems was secure and critical services to customers were operating without disruption. From then onwards the RBI, in close coordination with the CERT-In, has issued over 10 advisories to supervised entities on various cyberthreats and best practices to be adopted. In addition, a series of video conferences were conducted regarding cybersecurity preparedness and broad cyber/IT threats in order to sensitise supervised entities. Further, owing to the increase in the number of digital transactions on account of the covid-19 crisis and associated threats, the government is in the process of setting up a system to secure the financial sector of the country from cyberattacks, and is establishing a specialised agency, CERT-Fin, for this purpose.

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The covid-19 pandemic has adversely affected most major economies, including Indian economy. In light of the lockdowns and market disruptions caused by covid-19, the valuations of several Indian companies have witnessed a significant decline. To combat any opportunistic takeovers or acquisitions of Indian companies, the Ministry of Commerce, on 17 April 2020, issued Press Note 3 (2020 Series) to amend the extant foreign direct investment policy; and the related amendments to the Foreign Exchange Management (Non-debt Instruments) Rules 2019 were notified in the notification dated 22 April 2020 in exercise of the powers conferred by clauses (aa) and (ab) of subsection (2) of section 46  of  the  Foreign  Exchange  Management  Act  1999, which amended the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (Revised NDI Rules). Based on the Revised NDI Rules, any investing entity that belongs to or is incorporated in or that is beneficially owned by a citizen of or a person situated in a country sharing a land border with India (concerned investor) must obtain the Indian government’s approval prior to making any investment. Further, to facilitate seamless investments in India during the pandemic, the Finance Ministry announced a slew of measures across several domains, including, inter alia, income tax filing, corporate affairs, the Insolvency and Bankruptcy Code 2016, the banking sector, and credit schemes to micro, small and medium-sized enterprises. For instance:

  • No additional fees were charged for late filing during a moratorium period from 1 April 2020 to 30 September 2020 in respect of any document etc, that was required to be filed with the Ministry of Corporate Affairs (MCA) registry, irrespective of its due date. This step contributed towards the reduction of compliance burden and enabled previous non-compliant companies and limited liability partnerships to make a fresh start.
  • The MCA, in a circular dated 24 March 2020, relaxed the regulations for companies conducting their annual general meeting (for the financial year ending 31 December 2019) (AGM) until 30 September 2020. Further, in a general order dated 8 September 2020, the MCA extended the timeline for conducting AGMs from 30 September 2020 to 31 December 2020.
  • The Reserve Bank of India, in a notification dated 27 March 2020, permitted all commercial banks (including regional rural banks, small finance banks and local area banks), cooperative banks, All India Financial Institutions, and non-banking financial companies (including housing finance companies and microfinance institutions) to allow a moratorium of three months on payments of equated monthly installments and installments in respect of all term loans outstanding as on 1 March 2020, which was further extended by another three months (until 31 August 2020).
  • The Supreme Court, in its order dated 23 March 2020 in WP (Civil) No. 3/2020 took suo motu cognisance of the difficulty faced by the litigants in approaching various courts and tribunals owing to the national lockdown and thereby extended the limitation period in all proceedings, irrespective of the limitation prescribed under the general law or special laws whether condonable, with effect from 15 March 2020 until further orders are passed by the Supreme Court.

In the wake of strict lockdowns in India owing to covid-19, to ensure regulatory continuity and progress new and pending cases, the Competition Commission of India (CCI) in a welcome move in 2020, issued a press release clarifying the procedure for the electronic filing of notification forms as well as online video consultations. Be it Form I/Form II combinations, green channel notifications or, even, combinations with remedies, it has been business as usual for the CCI’s combination division, which has conducted its review as seamlessly as possible with limited staff and work-from-home facilities. Additionally, in a welcome development, the CCI acknowledged the need for businesses to ‘join-hands’ to address the technical and economic challenges caused by covid-19 such as: disruptions in supply chains; the rationalisation of product ranges; the halting of pipeline products; and future supply concerns. In this regard, the CCI issued an advisory to businesses recognising the need of businesses (including those dealing in critical healthcare and essential commodities) to coordinate certain activities (including the formation of efficiency enhancing joint ventures). However, the advisory clarified that these activities shall be limited to: sharing data on stock levels; timings of operation; sharing of distribution networks and infrastructure; and transport logistics, research and development, production, etc. However, the CCI emphasised in the advisory that in its assessment of such coordinated activity, it will review factors such as accrual of benefits to consumers, improvement in production or the distribution and provision of goods and services, and economic development. This caveat clarifies that the CCI will only consider coordinated activity that is necessary and proportionate to address concerns arising from covid-19. The advisory further cautions that businesses taking advantage of covid-19 to contravene the provisions of the Competition Act 2002 will not be able to claim protection from the sanctions. On 27 March 2020, the CCI issued guidance (the Revised Notes) for parties to file a Form I and clarified the scope of information to be provided to the CCI while notifying a combination in Form I. The Revised Notes were essentially issued to incorporate the amendments introduced to Form I by CCI by way of gazette notification dated 13 August 2019. The Revised Notes: provide relaxation in mapping overlaps between the parties; provide relaxation in providing market facing information; and clarify the scope of ‘complementary’ products and services. It also requires an enhanced level of disclosure: from the acquirer with respect to its group activities; and on the details of the transaction, including the rights being acquired. The Revised Notes clarify: that market shares are to be provided for three years (as opposed to the earlier requirement of one year), only when the combined market shares of the parties for any plausible alternative relevant market exceeds 10 per cent; and the scope of complementary products and services. While mapping horizontal and vertical overlaps, parties are now required to consider entities in which they hold: a direct or indirect shareholding of 10 per cent or more; a right or an ability to exercise any right (including any advantage of commercial nature) that is not available to any ordinary shareholder; or a right or an ability to nominate a director or observer in another enterprise. Further, the CCI has also recently proposed to do away with the requirement for transacting parties to disclose (in Form I) and justify non-compete covenants as part of the combination. If this proposal is successful, then parties would be expected to conduct a self-assessment of non-compete covenants while making a notification in Form I. Moreover, the CCI will continue to have the power to conclude on the effects of these non-compete covenants through the provisions pertaining to anticompetitive agreements under the Competition Act. While the CCI sought public comments on its recommendation, it is yet to implement this amendment. 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Besides waiving various procedural compliances under certain laws, the Indian regulators have, inter alia, allowed companies to hold meetings through video conferences, to use digital signatures and to contribute towards awareness programmes and research related to covid-19 as part of their corporate social responsibility obligations. Further, the government rolled out various relief packages to address the ill-effects of lockdown on the economy and those affected. The government has also undertaken various measures to improve the ease of doing business in India. Clients would need to evaluate these in light of their specific circumstances.   * The authors would like to acknowledge Abhay Raj Singh Bundela, an associate at AZB & Partners, for his assistance with this chapter.

6.1. Recent developments

6.1.1. Are there in India any emerging trends or hot topics regarding antitrust regulation and enforcement in the pharmaceutical sector?

In October 2020, the Competition Commission of India (CCI) launched a market study to assess the competitive landscape in the pharmaceutical sector. The CCI indicated that the objective of the study is to assess antitrust concerns in the drug supply chain. The CCI has indicated that the study would primarily focus on the distribution segment of the pharmaceutical market, with a view to understanding:

  • discounts and margin policies at the wholesale and retail levels of the distribution system;
  • the role of trade associations in relation to various aspects of the distribution business;
  • regulatory rationalisation of trade margins and its impact on price and competition; and
  • the impact of e-commerce on price and competition.

The study also aims to investigate the proliferation of branded generic drugs in India and how this may affect competition, and to assess potential hurdles relating to the entry of biosimilar drugs in India. The market study is being conducted in consultation with relevant stakeholders, including pharmaceutical companies, stockists, chemists, sector experts, trade associations, doctors and regulators. 

6.1. Enforcement and compliance

6.1.1. Describe any national trends in criminal money laundering schemes and enforcement efforts. Describe any national trends in AML enforcement and regulation. Describe current best practices in the compliance arena for companies and financial institutions.

In the wake of economic offenders such as Nirav Modi and Vijay Mallya, who have fled the country since their fraud came to light, the Fugitive Economic Offenders Act 2018 (the Economic Offenders Act) was enacted with effect from 21 April 2018. The legislation gives the Indian government the power to attach all the assets (and not just the assets acquired from the proceeds of crime) of an individual against whom an arrest warrant has been issued for committing a prescribed offence where the value exceeds 1 billion rupees. The government has also stated that it will establish an international cooperative mechanism to attach the foreign assets of such declared fugitives. Absconding liquor baron Vijay Mallya became the first person to be declared a ‘fugitive economic offender’ under the Economic Offenders Act. The Directorate of Enforcement (ED) initiated proceedings against Mallya in 2016, alleging that he had used his business ventures to siphon huge amounts of money out of India. He had fled from India and moved to the United Kingdom. The High Court of Justice, according to publicly available information, dismissed his appeal against the Westminster Magistrates’ Court’s extradition order on 20 April 2020. Further, he has also lost leave to appeal against the High Court’s decision before the Supreme Court of the United Kingdom. Certain securities held by Mallya that had been attached by the ED have been sold to recover approximately 10 billion rupees. In February 2018, the ED registered a money laundering case against billionaire diamond dealer Nirav Modi for alleged fraud approximating 13 billion rupees. Modi fled the country and moved to the United Kingdom, despite a series of criminal summons issued to him by Indian courts. He was arrested in London, and the ED is working with the Crown Prosecution Service of the United Kingdom to extradite him back to India. According to publicly available information, a Special Court declared Modi as a fugitive economic offender in December 2019 on an application filed by the ED. By an order dated 25 September 2018, the Reserve Bank of India (RBI) imposed a monetary penalty of 50 million rupees on Federal Bank for non-compliance with the RBI directions in relation to, inter alia, certain know your customer and AML norms as well as for failure to pay compensation for delays in the resolution of ATM-related customer complaints. With the objective of reviewing anti-bribery and anti-corruption laws in India, certain amendments to the Prevention of Corruption Act 1988 (PCA) were introduced with effect from 26 July 2018. Under the erstwhile PCA, only the demand side of corruption (ie, the solicitation and acceptance of a bribe) was a criminal offence, and there was no provision to directly criminalise the supply side of corruption or the offering of a bribe to obtain an undue advantage, which has now been included as an offence. Further, the PCA now also specifically prescribes the consequences of an offence thereunder when committed by a company. By virtue of the same set of amendments, the new offences under the PCA have been listed as ‘scheduled offences’ under the Prevention of Money Laundering Act 2002. The RBI, on 18 December 2020, amended the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016. These amendments make it, inter alia, mandatory for the regulated entities to upload KYC records pertaining to accounts of legal entities whose accounts are opened after 1 April 2021 onto the Central KYC Records Registry (CKYCR), pursuant to Rule 9 (1A) of the PML Rules. Even the KYC data of accounts of individual customers and legal entities opened prior to the above-mentioned date have to be incrementally uploaded on the CKYCR.

6.2. Coronavirus

6.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Indian regulatory authorities have waived various procedural compliances under certain laws and extended certain compliance timelines. Other measures taken include contribution towards awareness programmes and research related to covid-19 being permitted as part of corporate social responsibility obligations of companies. Further, the government rolled out various relief packages to address the ill effects of lockdown on the economy and those affected. The government has also undertaken various measures to improve the ease of doing business in India. Clients would need to evaluate these in light of their specific circumstances.   * The authors would like to acknowledge Abhay Raj Singh Bundela, an associate at AZB & Partners, for his assistance with this chapter.

7.1. Recent developments

7.1.1. Are there any emerging trends, notable rulings or hot topics related to cryptoassets or blockchain in India?

The Supreme Court ruling of March 2020, setting aside the Reserve Bank of India (RBI) Circular, has been notable in bringing about a positive attitude to crypto trading in the Indian markets. Unlike resistance to cryptoassets, blockchain has recently gained much traction. The government report that forms the basis for the proposed legislation banning cryptocurrency acknowledges that blockchain will play a major role in the new digital age and explicitly excludes this technology from the purview of the ban. Private entities and government institutions have aggressively pushed for innovation using this technology. Noteworthy developments include the Andhra-Pradesh government developing and using blockchain in banking and finance as well as exploring the use of smart contracts. The defence minister has also declared that blockchain has ‘Revolutionised the existing paradigm of warfighting,’ and that the ministry is seeking to employ this technology to better safeguard the security of the critical infrastructure. In its white papers, the RBI has consistently highlighted the various uses of blockchain and encouraged its deployment in the financial services market. Given the vote of confidence, the Indian market is keenly following the policy initiatives that the government may potentially release in the coming years.

7.2. Coronavirus

7.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has been implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The Indian government has issued various guidelines concerning financial aid, health measures, etc, to address concerns arising from the covid-19 pandemic. Given the lack of clarity in regulating cryptocurrency and cryptocurrency businesses, no specific measures or initiatives have been taken in this area.

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These are the views and opinions of the author(s) and do not necessarily reflect the views of the Firm. This article is intended for general information only and does not constitute legal or other advice and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author/AZB. AZB does not claim that the article's content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.