Anti-Money Laundering (AML) guidelines are the laws, rules and bank-level controls designed to stop criminals from converting “dirty money” (proceeds of crime) into money that looks legal. In India, the framework is built around the Prevention of Money Laundering Act, 2002 (PMLA) and the RBI’s KYC Master Direction, 2016. This is a high-scoring, frequently tested topic for JAIIB, CAIIB, IBPS, SBI, RBI Grade B and NABARD exams.
1. What Is Money Laundering?
Money laundering means processing criminally obtained money through the financial system so that it appears to have come from a legitimate source. For example, someone earning illegal income from drugs, corruption or smuggling cannot use it openly, so they route it through banks and businesses to make it look like legal income.
Simple example: A drug dealer earns ₹1 crore, sets up a fake “restaurant business,” shows the ₹1 crore as restaurant income and pays tax on it — now the money appears legal.
2. Why AML Matters
Money laundering finances terrorism, drug trafficking, corruption, tax evasion and organised crime, and it weakens the economy and the banking system. AML controls protect the integrity of the financial system, which is why governments, regulators and banks must actively prevent it.
3. The Three Stages of Money Laundering
Stage 1 – Placement: Putting illegal cash into the financial system (cash deposits, buying gold or casino chips). This is the riskiest stage for the launderer because cash entry leaves traces.
Stage 2 – Layering: Hiding the source through many transactions — moving money between accounts, countries and shell companies — to make tracing impossible. Example: India → Dubai → Mauritius → back to India through several companies.
Stage 3 – Integration: The “cleaned” money returns to the launderer as legitimate-looking wealth, used to buy property, businesses or luxury goods.
Memory trick: PLI = Placement → Layering → Integration.
4. Legal Framework in India
4.1 Prevention of Money Laundering Act, 2002 (PMLA)
- Enacted: 2002. Came into force: 1 July 2005.
- Amended: multiple times (2005, 2009, 2012, 2015, 2019).
- Section 3: defines the offence of money laundering; Section 4: prescribes punishment.
- Section 45: the strict “twin conditions” for bail (offences are cognizable and non-bailable).
- Section 50: empowers the ED to summon persons and record statements.
- Targets the “proceeds of crime” derived from a scheduled offence (predicate offence).
4.2 Authorities Under PMLA
| Authority | Role |
|---|---|
| Enforcement Directorate (ED) | Investigation and prosecution. |
| Financial Intelligence Unit – India (FIU-IND) | Central agency that receives and analyses reports from banks (set up 2004). |
| Adjudicating Authority | Confirms attachment of property. |
| Appellate Tribunal | Hears appeals against ED/Adjudicating Authority orders. |
| Special Court | Conducts trials under PMLA. |
4.3 FIU-IND
- Set up in 2004; headquartered in New Delhi.
- Reports to the Finance Minister through the Economic Intelligence Council.
- Central national agency to receive, analyse and disseminate financial intelligence; all banks send their AML reports here.
4.4 Other Related Laws
Foreign Exchange Management Act (FEMA), 1999; Narcotic Drugs and Psychotropic Substances Act (NDPS), 1985; Unlawful Activities (Prevention) Act (UAPA), 1967; and the Benami Transactions (Prohibition) Act, 1988.
4.5 International Bodies
- FATF (Financial Action Task Force): the global AML/CFT standard-setter; HQ in Paris, established 1989 by the G7. India joined in 2010.
- 2024 update: In the June 2024 FATF Mutual Evaluation, India was placed in the “regular follow-up” category — the best of FATF’s four categories — a distinction shared by only a few G20 nations.
- Basel Committee on Banking Supervision: issues global KYC/AML guidance.
- Egmont Group: the global network of Financial Intelligence Units.
5. Punishment Under PMLA
- Imprisonment: minimum 3 years, maximum 7 years (up to 10 years for offences linked to the NDPS Act).
- Fine: no upper limit (at the court’s discretion).
- Property: proceeds of crime can be attached, frozen and confiscated.
- Offences are cognizable and non-bailable, with strict twin bail conditions under Section 45 (upheld by the Supreme Court in Vijay Madanlal Choudhary v. Union of India, 2022).
6. Reporting Requirements for Banks (to FIU-IND)
Under the PML (Maintenance of Records) Rules, 2005, banks must file these reports:
| Report | Covers | Threshold | Reporting Time |
|---|---|---|---|
| CTR (Cash Transaction Report) | Cash transactions | ₹10 lakh+ (single or connected in a month) | Monthly, by 15th |
| STR (Suspicious Transaction Report) | Any suspicious transaction | Any amount | Within 7 working days |
| CCR (Counterfeit Currency Report) | Forged/counterfeit notes | Any | Monthly, by 15th |
| NTR/NPO | NPO receipts | ₹10 lakh+ (or foreign equivalent) | Monthly, by 15th |
| CBWTR (Cross-Border Wire Transfer) | Cross-border wire transfers | ₹5 lakh+ in foreign currency | Monthly, by 15th |
No tipping off: a bank must never tell the customer that an STR has been filed against them.
7. Record-Keeping Requirements
- Transaction records: 5 years from the date of the transaction.
- Customer identification (KYC) records: 5 years from closure of the account / end of the business relationship.
(Earlier it was 10 years; reduced to 5 years by the PMLA Amendment, 2017.)
8. Customer Due Diligence (CDD) — Risk Categories
Banks classify customers by risk and update KYC accordingly (per RBI’s KYC Master Direction):
| Risk Level | Typical Customers | Periodic KYC Update |
|---|---|---|
| Low risk | Salaried, government/PSU employees | Once in 10 years |
| Medium risk | Self-employed, professionals, traders | Once in 8 years |
| High risk | PEPs, NGOs, trusts, cash-heavy businesses, foreigners (Enhanced Due Diligence) | Once in 2 years |
2025 relaxation: Per the RBI circular of 12 June 2025, low-risk customers whose KYC is due may continue transacting and complete updation within one year of the due date or by 30 June 2026, whichever is later. Banks can also accept self-declaration (no change / address change only) through Business Correspondents.
9. Politically Exposed Persons (PEPs)
RBI (amended definition, January 2024) defines PEPs as individuals who are or have been entrusted with prominent public functions by a foreign country — heads of state/government, senior politicians, senior government/judicial/military officials, senior executives of state-owned corporations and important political-party officials.
For PEPs, banks must obtain senior management approval to open an account, establish the source of funds, carry out enhanced ongoing monitoring, and extend the same treatment to family members and close associates.
10. Designated Director and Principal Officer
Every bank must appoint two key AML functionaries:
- Designated Director: a board-level director responsible for overall AML compliance; name communicated to FIU-IND.
- Principal Officer: a senior officer (usually at Head Office) responsible for filing CTR/STR/CCR/NTR, liaising with FIU-IND and day-to-day AML compliance.
11. Red-Flag Indicators of Suspicious Transactions
Staff should watch for: reluctance to provide ID; multiple deposits just below ₹10 lakh (structuring); unusually large cash deposits; transactions inconsistent with the customer’s known income; frequent international transfers without a business reason; an account used purely as a transit (money in and out the same day); fragmenting transactions across many accounts; sudden changes in transaction pattern; indifference to high charges or penalties; loans repaid suddenly in cash; and reluctance to meet officials in person.
12. Important Concepts
Structuring / Smurfing: breaking a large amount into smaller ones (e.g., several ₹9.5 lakh deposits) to stay below the CTR threshold — itself suspicious, so an STR must be filed.
Tipping off: informing a customer that an STR has been filed is strictly prohibited under PMLA and is a punishable offence.
Walk-in customers: for non-account-holder transactions (DD, RTGS, etc.) of ₹50,000 or more, full KYC is required.
Beneficial Owner: the real natural person who ultimately owns or controls a customer. Following the RBI/PMLA amendment of 2023, the controlling-ownership threshold was lowered to 10% for both companies/trusts and partnership firms (earlier 25% for companies and 15% for partnerships/trusts). The BO must be identified during KYC.
13. RBI’s Role
RBI issues the Master Direction on KYC (dated 25 February 2016, amended through 2025), conducts AML inspections, imposes penalties for non-compliance and coordinates with FIU-IND, the ED and FATF.
14. Penalties on Banks for Non-Compliance
RBI/FIU-IND can impose monetary penalties (commonly ₹10,000 to ₹1 lakh per failure), additional penalties under the Banking Regulation Act, and, in extreme cases, licence-related action — alongside serious reputational damage.
15. Quick Revision Cheat Sheet
| Point | Answer |
|---|---|
| 3 stages of money laundering | Placement → Layering → Integration |
| PMLA enacted / effective | 2002 / 1 July 2005 |
| PMLA punishment | 3–7 years (up to 10 for NDPS-linked) |
| FIU-IND | Set up 2004, HQ New Delhi, reports to Finance Minister |
| FATF | Established 1989, HQ Paris; India joined 2010; “regular follow-up” (2024) |
| CTR threshold / time | ₹10 lakh+ / monthly by 15th |
| STR time | Within 7 working days |
| Cross-border wire transfer | ₹5 lakh+ |
| Record keeping | 5 years (transactions and KYC) |
| Walk-in customer KYC | ₹50,000+ |
| Beneficial owner threshold | 10% (companies, trusts and partnerships) |
| KYC update: low / medium / high | 10 / 8 / 2 years |
| Tipping off | Prohibited |
Most Important MCQs — AML & PMLA
Read each question with its options, attempt it, then click “Show Answer” to check. Useful for JAIIB, CAIIB, IBPS, SBI, RBI Grade B and NABARD.
How this topic is tested: Since the exam boards don’t release official papers, these are original practice questions modelled on common patterns. AML questions cluster around fixed facts — the three stages, the PMLA dates, the FIU-IND / ED / FATF trio, the reporting thresholds (CTR ₹10 lakh, CBWTR ₹5 lakh, STR 7 days), the record-keeping period (5 years), the beneficial owner 10%, and the CDD intervals. Lock these in.
Chapter 1: Basics & Stages
Q1. The correct order of the three stages of money laundering is:
a) Layering → Placement → Integration b) Placement → Layering → Integration c) Integration → Layering → Placement d) Placement → Integration → Layering
Show Answer
Answer: b) Placement → Layering → Integration (memory trick: PLI).
Q2. Which is considered the riskiest stage of money laundering for the launderer?
a) Placement b) Layering c) Integration d) Reconciliation
Show Answer
Answer: a) Placement — introducing cash into the system leaves the most traces.
Q3. Money laundering essentially involves converting:
a) Clean money into cash b) Proceeds of crime into legitimate-looking money c) Foreign currency into rupees d) Gold into cash
Show Answer
Answer: b) Converting proceeds of crime into money that appears legal.
Chapter 2: PMLA & Authorities
Q4. The Prevention of Money Laundering Act (PMLA) came into force on:
a) 1 July 2005 b) 1 April 2002 c) 1 January 2004 d) 1 July 2002
Show Answer
Answer: a) 1 July 2005 (the Act was enacted in 2002).
Q5. Which agency investigates and prosecutes money-laundering offences under PMLA?
a) FIU-IND b) CBI c) Enforcement Directorate (ED) d) SEBI
Show Answer
Answer: c) Enforcement Directorate (ED)
Q6. FIU-IND was established in which year and is headquartered where?
a) 2002, Mumbai b) 2004, New Delhi c) 2005, Chennai d) 2010, Kolkata
Show Answer
Answer: b) 2004, New Delhi — it reports to the Finance Minister.
Q7. Under PMLA, money-laundering offences are:
a) Non-cognizable and bailable b) Cognizable and non-bailable c) Compoundable d) Civil only
Show Answer
Answer: b) Cognizable and non-bailable — with strict twin bail conditions under Section 45.
Q8. The punishment under PMLA is generally imprisonment of:
a) 1–3 years b) 3–7 years (up to 10 for NDPS-linked) c) 5–15 years d) Life imprisonment
Show Answer
Answer: b) 3–7 years, extendable to 10 years where the offence is linked to the NDPS Act.
Chapter 3: Reporting & Records
Q9. The threshold for filing a Cash Transaction Report (CTR) is:
a) ₹50,000 b) ₹1 lakh c) ₹10 lakh d) ₹50 lakh
Show Answer
Answer: c) ₹10 lakh (single or connected transactions in a month); filed monthly by the 15th.
Q10. A Suspicious Transaction Report (STR) must be filed within:
a) 24 hours b) 3 days c) 7 working days d) 15 days
Show Answer
Answer: c) 7 working days of being satisfied the transaction is suspicious.
Q11. The reporting threshold for a Cross-Border Wire Transfer Report (CBWTR) is:
a) ₹1 lakh b) ₹5 lakh c) ₹10 lakh d) ₹50 lakh
Show Answer
Answer: b) ₹5 lakh in foreign currency; reported monthly by the 15th.
Q12. Banks must preserve transaction records for a period of:
a) 3 years b) 5 years c) 8 years d) 10 years
Show Answer
Answer: b) 5 years (reduced from 10 years by the PMLA Amendment, 2017).
Q13. Informing a customer that an STR has been filed against them is called:
a) Structuring b) Smurfing c) Tipping off d) Layering
Show Answer
Answer: c) Tipping off — strictly prohibited and punishable under PMLA.
Chapter 4: CDD, PEP & Beneficial Owner
Q14. Breaking a large sum into smaller deposits to avoid the CTR threshold is known as:
a) Integration b) Structuring (smurfing) c) Netting d) Hedging
Show Answer
Answer: b) Structuring / smurfing — itself a suspicious activity requiring an STR.
Q15. For walk-in (non-account-holder) transactions, full KYC is required at or above:
a) ₹10,000 b) ₹25,000 c) ₹50,000 d) ₹1 lakh
Show Answer
Answer: c) ₹50,000
Q16. After the 2023 amendment, the beneficial-owner ownership threshold for companies and partnerships is:
a) 25% b) 15% c) 10% d) 5%
Show Answer
Answer: c) 10% — lowered from 25% (companies/trusts) and 15% (partnerships).
Q17. The periodic KYC update interval for a HIGH-risk customer is:
a) 2 years b) 5 years c) 8 years d) 10 years
Show Answer
Answer: a) 2 years (medium = 8 years, low = 10 years).
Q18. A Politically Exposed Person (PEP), per RBI’s definition, holds prominent public functions in a:
a) Local municipality b) Foreign country c) Private company d) Co-operative society
Show Answer
Answer: b) Foreign country — opening a PEP account needs senior management approval and EDD.
Chapter 5: International & Compliance
Q19. FATF was established in 1989 and is headquartered in:
a) New York b) London c) Paris d) Geneva
Show Answer
Answer: c) Paris — set up by the G7. India joined FATF in 2010.
Q20. In the 2024 FATF Mutual Evaluation, India was placed in which category?
a) Grey list b) Black list c) Regular follow-up d) Enhanced follow-up
Show Answer
Answer: c) Regular follow-up — the best of FATF’s four categories.
Q21. The global network of Financial Intelligence Units is the:
a) Basel Committee b) Egmont Group c) Wolfsberg Group d) IOSCO
Show Answer
Answer: b) Egmont Group
Q22. The board-level official responsible for a bank’s overall AML compliance is the:
a) Principal Officer b) Designated Director c) Branch Manager d) Compliance Clerk
Show Answer
Answer: b) Designated Director; the Principal Officer handles day-to-day reporting to FIU-IND.
Frequently Asked Questions (FAQs)
What are the three stages of money laundering?
Placement (putting illegal cash into the system), Layering (disguising the source through many transactions) and Integration (using the “cleaned” money openly). Memory trick: PLI.
Which law governs anti-money laundering in India?
The Prevention of Money Laundering Act, 2002 (PMLA), which came into force on 1 July 2005, supported by RBI’s KYC Master Direction, 2016.
What is the threshold for a Cash Transaction Report (CTR)?
₹10 lakh or more in cash (single or connected transactions in a month), reported to FIU-IND monthly by the 15th.
How long must banks keep AML records?
5 years — for both transaction records and KYC records (reduced from 10 years by the 2017 amendment).
What is the beneficial owner threshold under the latest rules?
10% ownership or control for companies, trusts and partnership firms (lowered from the earlier 25%/15% by the 2023 amendment).
Conclusion
AML compliance protects both the banking system and the wider economy from criminal money. For exams, anchor your memory on the three stages (PLI), the PMLA dates (2002/2005), the FIU-IND–ED–FATF trio, the reporting thresholds (CTR ₹10 lakh, CBWTR ₹5 lakh, STR within 7 days), the 5-year record-keeping rule, the 10% beneficial-owner threshold and the 10/8/2-year CDD intervals. Master these and you cover almost every question asked on this topic.
For AML MCQs, please click here.