Related party relationships are common in the business world. Companies often conduct transactions through subsidiaries, associates, and joint ventures. While financial statements usually present transactions on an arm’s length basis, this assumption might not hold for transactions between related parties. Related party arrangements may involve different terms and conditions compared to those with unrelated parties. For example, services may be provided without charge, or interest-free loans may be extended. These factors can impact the financial position and performance of the entity.
Even without any transactions, the existence of a related party relationship can affect decisions and performance. For example, a parent company may instruct a subsidiary to stop trading with a third party or suspend research activities. Similarly, some transactions would not occur without the related party relationship. A company may rely on sales to its parent entity and might not have any alternative buyers. Because such transactions may not occur on an arm’s length basis, sufficient disclosure is essential. Ind AS 24 sets the framework for providing that information.
This standard ensures users of financial statements receive relevant disclosures that help them understand the financial position and performance of the entity in the correct context. It aims to clarify relationships and transactions that could affect the reported figures in the financial statements.
Scope and Application of Ind AS 24
Ind AS 24 applies to individual and consolidated financial statements prepared under Ind AS 110 and Ind AS 27. The standard requires entities to identify related party relationships and transactions, outstanding balances, and any commitments. It also specifies when disclosures are necessary and what must be disclosed.
This standard should be applied in identifying relationships and transactions with related parties, identifying outstanding balances and commitments between an entity and its related parties, identifying the circumstances in which disclosure is required, and determining the specific disclosures needed.
The standard does not apply where disclosure would breach confidentiality obligations imposed by law or regulation. For instance, banks may be legally required to maintain the confidentiality of customer transactions. In such cases, if disclosing related party transactions would violate these requirements, the entity is not obligated to disclose the information under Ind AS 24.
Intra-group transactions are not required to be disclosed in consolidated financial statements, as those statements present the group as a single reporting entity. However, this exemption does not apply when a parent is an investment entity that measures its subsidiaries at fair value through profit or loss.
Understanding Who Is a Related Party
A related party may be a person, an entity, or an unincorporated business. A related party has a connection with the entity preparing financial statements. A person or close member of their family is related to a reporting entity if that person has control or joint control of the entity, has significant influence over the entity, or is a key managerial personnel of the entity or its parent.
An entity is related to the reporting entity if any of the following applies. They are members of the same group, meaning parents, subsidiaries, and fellow subsidiaries are related. One entity is an associate or joint venture of another, or another group member. Both are joint ventures of the same third party. One is a joint venture,, and the other is an associate of the same third entity. The entity is a post-employment benefit plan for the employees of the reporting entity or a related party. The entity is controlled or jointly controlled by a person identified earlier. A person with control or joint control over one entity has significant influence over the other or is a key managerial personnel of the other. The entity provides key managerial personnel services to the reporting entity or its parent.
Control is defined as having power over the investee, exposure or rights to variable returns from the involvement, and the ability to influence those returns. Joint control is a contractual arrangement requiring unanimous consent for relevant decisions. Significant influence means the ability to participate in financial and operational policy decisions without having control.
When an individual or close family member has control, joint control, or significant influence, or is a key managerial personnel, that individual and their close relationships are related parties to the reporting entity.
Understanding Close Members of the Family
Close members of the family are those individuals who may influence or be influenced by a person in dealings with the entity. These include the person’s children, spouse or domestic partner, siblings, parents, children of the spouse or domestic partner, and dependents of the person or the spouse or domestic partner.
These individuals are considered related not only due to legal ties but also due to the expectation that they may participate in decisions that affect the financial or operational matters of the reporting entity. Influence may be exercised through formal authority or simply through family connection, especially in privately owned businesses or closely held corporations.
Defining Key Managerial Personnel
Key managerial personnel are those with the authority and responsibility to plan, direct, and control the activities of an entity. They may be executive or non-executive directors. Examples include managing directors, whole-time directors, and chief executive officers. Individuals whose directions the board of directors routinely follows are also considered key managerial personnel.
Being a key managerial personnel is not limited to holding a specific job title. The test is whether the individual exercises authority over significant business decisions. For example, a non-executive director may qualify if they influence the entity’s major strategies or operations.
In consolidated financial statements, directors of subsidiaries are not automatically related parties of the group. Disclosure is required only if these individuals are key managerial personnel of the group as a whole. Their remuneration should be aggregated with other KMP disclosures. Specific individual-level disclosures are not required unless mandated by law.
The status of a non-executive director as KMP depends on their role. If they actively participate in planning, directing, or controlling operations, they are considered KMP. If they do not engage in such decisions, they are not.
Analysis of Entity-Level Relationships
An entity is related to the reporting entity if it belongs to the same group. That includes parents, subsidiaries, and fellow subsidiaries, but excludes associates and joint ventures unless other criteria apply.
An investor and its associate are related. For instance, if entity A has significant influence over entity B, entity A is the investor and entity B is the associate. The relationship also includes associates of other group members. The same applies to joint ventures and their venturers. Two entities that are joint ventures of the same third party are also related. If a third entity is both a venturer of one and an investor in another, those two entities are related.
When a person controls or jointly controls one entity and also has significant influence over another or is its KMP, those two entities are related. The same principle applies when an entity is controlled by a person and that person has significant influence over another.
Entities providing key managerial personnel services to the reporting entity or its parent are also considered related parties. This is common in the fund management industry. A fund manager that controls or significantly influences an investment entity is in a related party relationship with it. Even if the manager is not a related party by control, the fees paid for management services must be disclosed, though salaries paid to the manager’s staff need not be disclosed separately.
Extended Understanding of Entity-Level Related Parties
An associate includes its subsidiaries, and a joint venture includes subsidiaries of the joint venture. This means a subsidiary of an associate is also a related party to the investor. Similarly, a subsidiary of a joint venture is a related party to the venturer. This linkage extends the circle of related parties and must be evaluated carefully when preparing disclosures.
Consider a structure where entity A owns 40 percent of entity B and has significant influence over it. Entity B owns 70 percent of entity C, making C its subsidiary. Entity B also owns 30 percent of entity D and exercises significant influence over it. In this situation, entity A is required to disclose its transactions with entity C, as C is a subsidiary of its associate B. However, entity A is not required to disclose transactions with entity D, because it neither has control nor significant influence over D. Entity D is not a related party to entity A.
From entity C’s perspective, transactions with entity A must be disclosed, since A is related due to its influence over C’s parent. However, entity D is not required to disclose transactions with A because it does not have a related party relationship with A.
The same analysis extends to other structures where investment chains exist. Subsidiaries of associates and joint ventures are related to the investor or venturer, and this must be evaluated on a case-by-case basis.
Post-Employment Benefit Plans as Related Parties
A post-employment benefit plan established for the benefit of employees of the reporting entity or any of its related parties is itself a related party. If the reporting entity itself is a benefit plan, its sponsoring employers are considered related parties.
Consider an example where X Ltd., Y Ltd., and Z Ltd. have created a joint provident fund or gratuity trust. This trust is a related party to X Ltd. and all entities that are related to X Ltd. In reverse, from the trust’s point of view, X Ltd., Y Ltd., and Z Ltd. are related parties if they contribute to the plan. The relationship is determined based on the purpose of the plan and the entities that benefit from or fund it.
These plans typically include pension funds, gratuity funds, and other employee welfare schemes. Because these benefit plans are funded by employers and benefit employees of the entity, transparency in their transactions with the entity is required.
Entities Controlled by an Individual with Existing Control or Influence
If an individual identified as having control, joint control, or significant influence over the reporting entity also controls or jointly controls another entity, then the two entities are related parties. Similarly, if such an individual is a key managerial personnel in one entity and controls another, both entities become related.
Assume Mr. A controls X Ltd. and also controls Y Ltd. In this case, Mr. A is related to both X and Y. Moreover, X Ltd. and Y Ltd. are related to each other because they are under the common control of the same individual. If Mr. A is a key managerial personnel in Y Ltd. but controls X Ltd., X Ltd. and Y Ltd. are still considered related.
When assessing related party status, the test is whether the same individual exercises decision-making authority or influence over both entities. If yes, a related party relationship exists. This rule ensures that transactions occurring under such common control are adequately disclosed.
Situations Involving Key Managerial Personnel Services
Some entities, particularly investment companies, outsource their management functions. In such cases, an external entity or individual provides key managerial personnel services to the reporting entity. These arrangements are common in asset management and fund administration.
If such a service provider is related to the reporting entity by way of control or significant influence, they are considered a related party. For example, if E Ltd. provides key management personnel services to A Ltd., and A Ltd. is the parent of B Ltd., C Ltd., and D Ltd., then E Ltd. is a related party to all these companies.
However, where a management entity provides services through its employees, disclosure is required only for the fees paid to the management entity. Salaries paid by the management entity to its staff are not considered related party transactions for the reporting entity. The focus of the disclosure is on the services rendered and the fees paid by the reporting entity to the management entity.
If the fund manager serves only one client and exercises control or significant influence, this should be disclosed in the financial statements. The substance of the arrangement is important, especially if the fund manager operates exclusively for the benefit of the entity and effectively controls its key decisions.
Illustrative Example Involving Individual Control and Influence
Suppose Mr. X has investments in both entity A and entity B. Mr. X controls entity A and also has control or significant influence over entity B. In such a scenario, A and B are considered related parties.
From the perspective of entity A, entity B becomes a related party because the same individual controls both. Similarly, from the perspective of entity B, entity A is a related party due to the common controlling individual.
However, if Mr. X only has significant influence over both entities without control or joint control, then A and B are not considered related parties to each other. Significant influence by itself over two separate entities does not create a related party relationship between those entities.
The distinction between control and significant influence is critical. Control creates a stronger link and results in broader related party disclosure requirements. Significant influence alone does not automatically link two entities as related unless further qualifying conditions exist.
Related Party Classification Based on Family Relationships
Consider a case where person X is the domestic partner of person Y. X controls or significantly influences entity A, and Y controls or significantly influences entity B. Whether A and B are related depends on the extent of control or influence each person has.
If X controls entity A and Y controls or significantly influences entity B, A and B are related due to the close family relationship between X and Y. Domestic partners are included under the definition of close members of the family, and their investments and positions must be evaluated accordingly.
However, if X and Y each only have significant influence, A and B are not considered related. The standard distinguishes between control and influence to determine the relationship. Close family connections extend the scope of related parties when control or key roles exist, but not in the case of passive investment influence.
Analysis of Relationships with Direct and Indirect Subsidiaries
Assume Mr. A has full ownership of entity X and is a key managerial personnel in entity Y. Entity Y fully owns entity Z. The relationship chain indicates multiple related party connections.
Entity X’s financials must disclose transactions with entity Y and Z, since Mr. A is a key managerial personnel of Y and he controls X. This makes Y and Z related to X. From entity Y’s perspective, both X and Z are related parties. Mr. A’s control over X and his managerial role in Y establish the related party relationship.
From entity Z’s perspective, X is a related party due to Mr. A’s involvement in its parent, entity Y. These relationships must be disclosed in the respective financial statements. Disclosure enables stakeholders to understand the nature of interactions between these entities and the possible impact on financial outcomes.
When tracing related parties, it is essential to consider both direct and indirect involvement. Parent-subsidiary relationships often span multiple layers. Individuals involved in planning, directing, or influencing decisions at any level of the group may trigger related party disclosures.
Evaluation of Joint Investments by a Couple
Consider a situation where a husband and wife jointly control 34 percent of the voting rights in XY Ltd. They also operate a separate partnership firm that supplies raw materials to XY Ltd. Management claims that the transaction with the partnership need not be disclosed.
Under Ind AS 28, holding 20 percent or more of the voting power implies significant influence unless proven otherwise. In this case, the couple holds 34 percent, which likely gives them significant influence over XY Ltd.
Under Ind AS 24, the partnership firm is controlled by individuals who also have significant influence over XY Ltd. This meets the conditions of a related party relationship. Consequently, the transaction between XY Ltd. and the partnership firm should be disclosed.
When individuals influence or control both entities in a transaction, the reporting entity must treat it as a related party transaction. Failing to disclose such transactions may mislead stakeholders and misrepresent the financial position of the entity.
Key Capabilities of Intelligent Automation
Intelligent Automation enables businesses to accomplish tasks in new ways by combining complementary capabilities of RPA and AI. These capabilities work in synergy to handle structured, semi-structured, and unstructured data. IA systems possess several core features that make them powerful tools for modern business environments. Some of these capabilities include:
Machine Learning
Machine Learning (ML) algorithms allow IA systems to learn from historical data and past experiences. Unlike traditional rule-based RP, which depends on fixed instructions, ML helps systems improve performance over time by identifying patterns and anomalies. ML can be used for demand forecasting, fraud detection, customer segmentation, and process optimization. By training on existing datasets, IA solutions can make predictions or classifications without human intervention.
Natural Language Processing
Natural Language Processing (NLP) allows IA systems to read, understand, and respond to human language. This is crucial for automating interactions such as reading customer emails, responding through chatbots, or summarizing documents. NLP combines computational linguistics with statistical and deep learning models to interpret human input accurately. It enhances the reach of automation to tasks involving unstructured language data.
Computer Vision
Computer Vision allows systems to interpret and act upon visual inputs like scanned documents, images, or video feeds. In IA, computer vision is often used for invoice scanning, facial recognition for security, and defect detection in manufacturing. It makes automation applicable to domains that require visual inspection or understanding.
Decision Management
Decision Management refers to IA’s ability to make rule-based or probabilistic decisions. Combining business rules with AI, the system can evaluate data and decide on the appropriate next steps. For example, in insurance claims, IA can approve standard claims automatically or route complex ones to human agents. This feature improves speed, accuracy, and consistency in business operations.
Workflow Orchestration
IA platforms often include workflow orchestration tools that coordinate multiple bots, systems, and human workers. This ensures end-to-end process automation by linking isolated tasks. Workflow orchestration makes it possible to map complex business processes, monitor task progress, and assign roles dynamically. It is essential for achieving full digital transformation.
Self-Learning and Continuous Improvement
IA systems can be built to monitor their performance and adjust behaviors based on feedback. This self-learning loop improves outcomes over time. For instance, if an IA system finds that its classification model is underperforming, it may request more training data or flag issues for human review. Such adaptive systems lead to higher efficiency and better customer experiences.
Intelligent Automation in Different Industries
IA is being used across various industries to drive transformation, increase productivity, and improve service quality. Let’s look at how it is implemented in several key sectors.
Healthcare
In healthcare, IA is used for administrative automation such as billing, claims processing, appointment scheduling, and electronic health record management. On the clinical side, IA helps with diagnostics through AI-enabled imaging, predictive analytics for patient outcomes, and monitoring systems that alert staff to emergencies. IA reduces paperwork for medical professionals, improves patient service, and ensures compliance with regulations.
Financial Services
Banks and insurance firms use IA to manage fraud detection, loan processing, compliance, risk assessment, and customer service. For example, IA can automate Know Your Customer checks using OCR and facial recognition, monitor transactions for unusual patterns, or provide customers with account updates through chatbots. IA improves accuracy and speeds up processes, which enhances customer trust and operational efficiency.
Manufacturing
In manufacturing, IA is key to predictive maintenance, supply chain optimization, quality control, and order processing. Machines equipped with IoT sensors feed data into IA systems that forecast maintenance needs before breakdowns occur. Computer vision helps detect product defects in real-time. IA can also help optimize resource allocation and reduce downtime.
Retail and E-commerce
Retailers use IA for inventory management, personalized marketing, customer support, and order fulfillment. IA systems can predict stock shortages, tailor offers based on customer behavior, and manage returns with minimal human input. Chatbots and virtual agents answer customer queries, recommend products, and resolve complaints 24/7. This results in better shopping experiences and improved customer loyalty.
Telecommunications
Telecom companies rely on IA for network optimization, customer onboarding, service request handling, and billing. Intelligent bots process huge volumes of customer requests, detect technical faults in networks, and suggest solutions. Predictive analytics help telecom companies anticipate customer churn and take preventive action. IA helps reduce costs while improving service delivery.
Human Resources
IA transforms HR operations by automating candidate screening, onboarding, payroll, and performance evaluations. Resume parsing using NLP, chatbot-driven interview scheduling, and employee data management help HR departments operate more efficiently. IA ensures faster hiring processes and improves employee engagement.
How Intelligent Automation Drives Business Value
Implementing IA delivers measurable business value by improving key performance indicators and enhancing customer and employee experiences.
Operational Efficiency
IA reduces process time by eliminating repetitive manual work and accelerating workflows. Automation leads to faster service delivery and shorter cycle times. For instance, a loan approval process that once took days can now be completed in minutes.
Cost Savings
By automating high-volume, repetitive tasks, businesses can save significantly on labor costs. IA also reduces error rates, which lowers the cost of rework or corrections. Additionally, operational costs decline due to reduced reliance on physical paperwork, manual data entry, and call centers.
Scalability
IA allows organizations to scale operations quickly without a corresponding increase in workforce. During peak seasons or unexpected surges in demand, digital workers can handle large volumes without burnout or delay.
Compliance and Risk Mitigation
IA ensures consistent application of rules and guidelines, which improves compliance with industry regulations. It also maintains detailed audit trails and real-time reporting, helping businesses avoid legal issues and financial penalties. Moreover, predictive analytics tools can assess risks and trigger alerts in advance.
Employee Experience
IA relieves employees from tedious, low-value tasks and allows them to focus on strategic, creative, or customer-facing roles. This improves job satisfaction and reduces burnout. With IA taking care of repetitive work, employees can contribute more meaningfully to business growth.
Enhanced Customer Experience
IA ensures quick, accurate, and personalized service delivery. Whether it is a chatbot answering queries instantly or an automated process resolving issues faster, customers experience fewer delays and more satisfaction. This leads to higher retention and brand loyalty.
Innovation Enablement
By freeing up time and resources, IA opens the door for innovation. Businesses can reimagine customer journeys, create new products, and experiment with data-driven business models. IA provides the foundation for future-ready digital enterprises.
Challenges in Implementing Intelligent Automation
While IA offers many benefits, its implementation is not without challenges. Companies must be aware of the roadblocks they may encounter and prepare for them in advance.
Data Quality and Availability
AI systems rely heavily on quality data for training and decision-making. Inconsistent, outdated, or biased data can lead to inaccurate predictions. Businesses must ensure proper data governance, validation, and cleansing processes are in place before implementing IA.
Integration with Legacy Systems
Many organizations still operate on legacy IT systems that are incompatible with modern IA solutions. Integrating these systems may require significant investment, custom APIs, or middleware. A lack of integration can limit IA’s reach and effectiveness.
Change Management and Resistance
Employees may resist automation due to fears of job loss or disruption to familiar workflows. Successful IA adoption requires change management strategies, including transparent communication, reskilling programs, and stakeholder engagement.
Ethical and Regulatory Concerns
AI-driven systems raise questions around data privacy, algorithmic bias, and accountability. Regulators are developing frameworks to govern AI usage, and businesses must ensure compliance with these evolving laws. Transparent and explainable AI models are necessary for trust and governance.
High Initial Investment
Setting up IA infrastructure can be expensive. Costs may include software licensing, cloud infrastructure, training datasets, development resources, and ongoing maintenance. Organizations must calculate return on investment and prioritize high-impact use cases.
Security Risks
As IA systems gain access to sensitive data and control over critical processes, they become attractive targets for cyberattacks. Proper authentication, encryption, and monitoring mechanisms must be in place to protect data and maintain system integrity.
Maintenance of Records for Five Years
Every reporting entity is required to maintain the prescribed information in such manner and for such period as may be specified by rules. Specifically, section 12(4) of the Prevention of Money Laundering Act mandates that records be retained for five years from the date of transaction or cessation of business relationship between the client and the reporting entity, whichever is later. This requirement helps in facilitating investigation and prosecution in cases involving money laundering and other related crimes. The rationale behind the five-year requirement lies in enabling authorities to have access to historical data to establish patterns, client behaviors, or linkages to illegal financial activities. This retention obligation extends to all types of records, including client identification, financial transactions, account details, and correspondence. The five-year window ensures that the relevant agencies, such as the Enforcement Directorate, Financial Intelligence Unit (FIU-IND), or other competent authorities,, have adequate time and information to pursue inquiries and proceedings.
Implementation of Client Due Diligence Measures
Client Due Diligence (CDD) is one of the cornerstone responsibilities under the PMLA framework. As per section 12AA, every reporting entity must perform due diligence of its clients in the prescribed manner. This includes identification and verification of the client using reliable, independent source documents, data, or information. Reporting entities are also required to understand the nature of the client’s business, ownership, and control structure. CDD also requires monitoring the transactions of the client on an ongoing basis to ensure that the activities being conducted are consistent with the entity’s knowledge of the client, their business, and risk profile. Special attention must be paid to complex or unusually large transactions and unusual patterns that have no apparent economic or lawful purpose. In case of high-risk categories, enhanced due diligence procedures are required. This includes obtaining additional information on the customer, the intended nature of the business relationship, and the source of funds. Reporting entities must also ensure that the information and documents collected during CDD are updated periodically, especially in cases where there is a suspicion of money laundering or terrorist financing.
Reporting of Suspicious Transactions
Section 12 of the Act casts an obligation on every reporting entity to furnish details of suspicious transactions to the Director, Financial Intelligence Unit, India (FIU-IND). The term ‘suspicious transaction’ has been defined to include transactions that give rise to a reasonable ground of suspicion that the proceeds may be related to criminal activity or that the transactions are structured to avoid reporting requirements. The reporting should be done in the prescribed format and within the time limits set forth under the rules. The objective behind suspicious transaction reporting is to generate actionable financial intelligence for law enforcement and regulatory authorities. Failure to report suspicious transactions can attract penalties and reputational risks for the reporting entity. The identification of suspicious transactions requires a combination of automated systems and human judgment. Staff of the reporting entities are often trained to identify red flags such as a sudden increase in account activity, repeated small deposits just under the reporting threshold, use of multiple accounts with no clear business rationale, and inconsistent documentation or client behavior. It is important that the reporting process is kept confidential to prevent tipping off the client, which is prohibited under the Act.
Confidentiality of Information and Protection for Reporting Entity
The PMLA provides legal protection to reporting entities and their employees who, in good faith, furnish information relating to suspicious transactions or prescribed records. As per section 14 of the Act, no civil or criminal proceedings shall lie against the reporting entity or its directors, officers, and employees for furnishing such information to the Director. This immunity provision is critical in encouraging reporting entities to comply with their obligations without fear of litigation or retribution from clients or third parties. Additionally, section 13(2) empowers the Director to take appropriate action, including issuing warnings, directions, or imposing monetary penalties, if a reporting entity fails to comply with the provisions of the Act. The confidentiality of the identity of the reporting person and the contents of the report is maintained throughout the process to ensure the security and privacy of the individual or institution making the disclosure. Disclosure of the fact that a suspicious transaction report has been filed or any details thereof to the concerned customer or any other unauthorized person is strictly prohibited and constitutes an offense under the PMLA. Such safeguards are essential to preserve the integrity and effectiveness of the financial intelligence framework in India.
Enforcement and Inspection by the Director
The Director appointed under the PMLA is vested with powers to enforce compliance from reporting entities. Under section 13 of the Act, the Director may call for records and conduct audits or inspections of the reporting entities to ensure compliance with the obligations under the Act. This includes the power to inspect the records maintained for client due diligence, records of transactions, and reports submitted to the FIU-IND. If the Director finds any failure or negligence in compliance, the Act provides for issuing warnings, directions for compliance, or even the imposition of monetary penalties. These powers are crucial in maintaining discipline and adherence to anti-money laundering measures among financial institutions and designated non-financial businesses and professions. The inspections may be periodic or triggered by specific inputs, complaints, or patterns detected through analytics. Reporting entities are required to cooperate fully with the Director and provide all documents, records, and personnel access necessary for a thorough examination. The results of inspections often lead to the issuance of advisories, improvement plans, or formal directions, and in some cases, penalties ranging from thousands to lakhs of rupees.
Penalty for Non-Compliance with Reporting Obligations
The Prevention of Money Laundering Act prescribes penalties for non-compliance by reporting entities. Section 13(2)(d) empowers the Director to impose monetary penalties ranging from ten thousand rupees to one lakh rupees for each failure. These failures may include non-maintenance of prescribed records, failure to report suspicious transactions, inadequate client due diligence, or any other contravention of the rules or directions under the Act. In case of repeated or deliberate violations, the penalties may also be accompanied by further regulatory or disciplinary action by sectoral regulators such as the Reserve Bank of India, SEBI, IRDAI, or the Ministry of Corporate Affairs, depending on the nature of the reporting entity. Penalties under the PMLA are meant to be deterrent rather than punitive and are generally preceded by show-cause notices, opportunities for hearing, and directions to rectify deficiencies. However, willful blindness or gross negligence in complying with reporting duties can attract severe consequences,, including cancellation of license or registration under sector-specific regulations. The PMLA also enables the Director to refer matters to the concerned regulator for further action, where appropriate.
Role of Sectoral Regulators in PMLA Compliance
Apart from the central authority under the PMLA, various sectoral regulators such as RBI, SEBI, IRDAI, and the Ministry of Finance have issued guidelines and circulars to ensure effective implementation of anti-money laundering measures. These guidelines are binding on their respective regulated entities and lay down detailed procedures for client due diligence, maintenance of records, employee training, audit mechanisms, and internal controls. For instance, the RBI’s Master Direction on Know Your Customer (KYC) requirements sets out obligations for banks and financial institutions in great detail. SEBI mandates stockbrokers, mutual funds, and other capital market intermediaries to comply with its anti-money laundering framework. The Insurance Regulatory and Development Authority of India (IRDAI) has laid out specific requirements for insurers regarding customer verification, suspicious transaction monitoring, and reporting. These regulatory frameworks supplement the provisions of the PMLA and create a layered system of oversight and accountability. Entities are expected to align both with sector-specific and PMLA-related obligations. Non-compliance with sectoral guidelines can lead to regulatory sanctions in addition to penalties under the PMLA. The coordination between FIU-IND, enforcement agencies, and sectoral regulators is a key feature of India’s anti-money laundering regime.
Internal Risk Management and Audit Mechanism
To fulfill their obligations under the PMLA, reporting entities must establish robust internal systems, including a well-defined risk management policy. This includes having a Money Laundering Reporting Officer (MLRO), internal audit functions, regular compliance reviews, and staff training programs. A clear reporting line should be established for employees to escalate unusual or suspicious transactions to the MLRO for evaluation and onward reporting to FIU-IND, if necessary. Internal audits must assess the adequacy and effectiveness of anti-money laundering measures and controls. The risk management framework must categorize customers, transactions, and products based on their risk levels and apply corresponding levels of scrutiny. High-risk customers such as politically exposed persons (PEPs), non-resident clients, or those from high-risk jurisdictions must be subject to enhanced due diligence. System-based alerts and manual reviews should be integrated to detect anomalies. Audit trails and logs should be maintained to document all actions taken under the PMLA framework. Periodic training of staff across all levels—especially front office and operations—is crucial to ensure awareness and preparedness in identifying and responding to money laundering risks. The Board of Directors or senior management of the entity should periodically review the performance of the compliance program.
International Cooperation and Role of FATF
India is a member of the Financial Action Task Force (FATF), an inter-governmental body that sets international standards to combat money laundering, terrorist financing, and proliferation financing. The obligations cast upon reporting entities under the PMLA align with the FATF recommendations. India undergoes periodic mutual evaluations by FATF and its regional associate, the Asia Pacific Group (APG), to assess the effectiveness of its anti-money laundering and countering the financing of terrorism (AML/CFT) regime. Reporting entities play a vital role in demonstrating the operational effectiveness of India’s compliance with FATF standards. The information submitted by reporting entities contributes to financial intelligence shared with international partners. FIU-IND has bilateral and multilateral arrangements with other financial intelligence units across jurisdictions for the exchange of information. Cooperation is also facilitated through platforms such as the Egmont Group. The cross-border nature of financial crimes requires Indian institutions to be vigilant in their dealings with foreign clients, correspondent accounts, and international transactions. Enhanced due diligence, screening against international sanctions lists, and flagging of suspicious cross-border transactions are critical areas of focus.
Conclusion
The framework of obligations imposed on reporting entities under the Prevention of Money Laundering Act is comprehensive and critical for maintaining the integrity of the financial system. These obligations are not merely procedural but are instrumental in preventing, detecting, and prosecuting money laundering and associated crimes. Maintenance of records, client due diligence, reporting of suspicious transactions, internal controls, and cooperation with authorities form the backbone of this regime. Compliance is not a one-time activity but an ongoing process that requires continuous vigilance, updating of procedures, and alignment with evolving risks and regulatory expectations. Failure to comply not only attracts statutory penalties but also exposes entities to reputational damage and regulatory sanctions. With the increasing sophistication of financial crimes, the responsibilities of reporting entities are expected to expand further, and proactive adherence to the obligations under PMLA will remain a crucial part of corporate and regulatory governance.