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JMLC
18,1

Suspicious transaction reporting:

an Indian experience
B. Viritha, V. Mariappan and Irfan Ul Haq

Department of Banking Technology, School of Management,

Pondicherry University, Puducherry, India
Abstract
Purpose The purpose of this paper is to assess the effectiveness of anti-money laundering (AML)
reporting system in India in terms of Suspicious Transaction Reports (STRs) and its impact on
countering money laundering through the conviction and confiscation. The main emphasis of financial
action task force (FATF) guidelines on AML and countering of financing of terrorism (CFT) is the
obligation of financial institutions and designated non-financial businesses and professions to
instantaneously report the suspicious transactions to Financial Intelligence Unit (FIU), an agency with
a mandate to deal with AML.
Design/methodology/approach It is a descriptive study to explore the outcome of the AML
process. The study has used the secondary information published in the annual reports of FIU-India and
FATF. The study period is 2006-2007 to 2011-2012.
Findings Though there is a significant increase in the STRs filed, the impact of AML is not realized
in terms of neither AML-related convictions nor confiscations, since the enactment of the Prevention of
Money Laundering Act (PMLA). However, the AML/CFT regime in India has just started earnestly, and
it still has to go a long way before stabilizing and achieve tangible results.
Research limitations/implications In the Indian context, only few of the effectiveness indicators
of the FATF methodology 2013 could be selected due to the limited availability of data, as much of the
information maintained by various stakeholders, including reporting entities, FIU-India and other
investigative and enforcement agencies, is kept confidential. Thus, it is difficult to establish the
effectiveness of enforcement function of AML. Evaluation of effectiveness of AML is judged on the
basis of convictions and confiscations.
Originality/value There is a dearth of studies assessing the reporting system under PMLA and
thus this paper attempts to throw some insights on the outcome of AML chain, especially the impact of
reporting suspicious transactions.
Keywords Reporting, Money laundering, FIU-India, PMLA
Paper type Research paper

1. Introduction
The severe impact of black money on the security of nations and their economy has
made many countries realize the importance of tracing and confiscating illegal money
for the safety, security and, above all, the betterment of its citizens. Hence, there is a

Journal of Money Laundering

Control
Vol. 18 No. 1, 2015
pp. 2-16
Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-11-2013-0046

The authors wish to express their sincere gratitude to the following people for their support in
completion of this study. Shri. B. Siva kumar, General Manager, Reserve Bank Staff College,
Chennai, India; Shri. Dr. R. Sankaranarayanan, Professor, Department of Banking Technology,
Pondicherry University, Pondicherry, India; Shri. Dr. B. Brahmananda Reddy, Professor and
Head of Department of Physiology, Rajiv Gandhi College of Veterinary and Animal Sciences,
Pondicherry, India.

mounting concern to curb the menace of money laundering all over the world. The fight
against this menace had its roots in 1988, when the money laundering was first
recognized as a criminal offence[1] by the United Nations through its resolution on
Illicit Traffic in Narcotic Drugs and Psychotropic Substances, which is popularly
referred as Vienna Convention. In 1989, the G7 countries, established an
inter-governmental body, namely, financial action task force (FATF), to specify and
promote legal, regulatory and operational measures, with an objective to counter money
laundering. The FATF initially issued 40 recommendations to prohibit the laundering
of illicit money and added 9 more recommendations specially to deal with countering of
financing of the terrorist activities after the incidence of 9/11 in 2001. These
recommendations are being accepted as international standards to counter the act of
money laundering and financing of terrorism. In 2012, these guidelines were revisited by
the FATF wherein it integrated most of the measures focusing on the terrorist financing
across its 40 recommendations, thereby obviating the need for the Special
Recommendations (FATF 2012). Recently, countering the illicit proliferation of weapons
of mass destructions has also been brought under the ambit of FATF recommendations.
Most of the measures to fight against the threats, viz., money laundering, terrorist
financing and illicit proliferation of weapons, are common, as they often display similar
transactional characteristics aiming at hiding the illicit activity.
The main emphasis of these international guidelines on anti-money laundering
(AML) and countering of financing of terrorism (CFT) is the obligation of financial
institutions and designated non-financial businesses and professions (DNFBPs), to
instantaneously report the suspicious transactions to Financial Intelligence Unit (FIU).
FATF guidelines recommended reporting of suspicious transactions when:
If a financial institution suspects or has reasonable grounds to suspect that funds are the
proceeds of a criminal activity, or are related to terrorist financing, it should be required, by
law, to report promptly its suspicions to the financial intelligence unit (FIU).

The financial institutions, their directors, officers and employees are prohibited by law
from disclosing (tipping-off) the fact that a suspicious transaction report (STR) or
related information is being filed with the FIU.
Hence, this paper makes an attempt to measure the effectiveness of AML regime in
India through the reporting system and impact of the AML on money laundering
through the number of convictions and confiscations. Accordingly, it discusses the
possible methods to measure the effectiveness of AML system disclosed by the earlier
studies and analyzes the current status of such reporting obligation in India.
2. Evolution of the AML reporting system
The Basel Committee in 1988 issued a statement of ethical principles (Basel Committee
on Banking Supervision, 1988) to ensure that banking channel is not used for washing of
illicit money and put forth: implementation of proper Customer Identification
Procedures; discouraging transactions that do not appear legitimate; and extending
cooperation to the law enforcement agencies. Under this statement, it is sufficient if the
banks refrain from seem-to-appear illegitimate transactions rather than reporting them
to the concerned authorities. There was no obligation on suspicious transaction
reporting in Basel Committee statement. This reflected the then deeply rooted bank

Suspicious
transaction
reporting
3

JMLC
18,1

secrecy (Ping, 2005) that restricted any such reports to be made. For the first time, the
issue of reporting was addressed in the FATF statement that recommended:
If financial institutions suspect that funds stem from a criminal activity, they should be
permitted or required to report promptly their suspicions to the competent authorities.
Accordingly, there should be legal provisions to protect financial institutions and their
employees from criminal or civil liability for breach of any restriction on disclosure of [][2].

However, it is clearly seen that reporting was not compulsory and it differentiated
between the mandatory and voluntary reporting[3].
In 1991, European Council directive on prevention of the use of the financial system
for the purpose of money laundering mandated the reporting of suspicious
transactions[4], and the provision was extended to include professions that are
susceptible to money laundering[5]. Owing to the changes in money laundering trends
and potential future threats, the FATF revised its recommendations wherein the
reporting system was made mandatory[6]. Also, it expanded the financial
recommendations to the non-financial business companies[7]. Thus the reporting
system evolved since 1988 from voluntary reporting to mandatory reporting of the
suspicious transactions, also widening the scope of the reporting institutions from
financial institutions to non-financial businesses or professions such as casinos, dealers
in real estate and precious metals, lawyers, notaries and other independent legal
professionals and accountants, whom are now considered to be vulnerable to money
laundering.
3. AML reporting system in India
India is a member of the Asia-Pacific Group since 1998 and a member of FATF and
Eurasian Group since 2010. The AML/CFT system is relatively young in India as the
enactment of the Prevention of Money Laundering Act 2002 (PMLA) was brought into
force from 1 July 2005. The Act imposed obligation[8] on banking companies, other
financial institutions and intermediaries of securities market, collectively referred as
reporting entities (see Table I), to furnish certain prescribed information (see Table II) to
the FIU India (FIU-IND). The Act was subsequently amended in the 2005, 2009[9] and
2012[10] that expanded the list of reporting entities. Table1 provides the list of various
entities/professions covered under the PMLA for reporting to FIU-India.
The reporting entities have to furnish the cash transactions above INR10 lakhs,
counterfeit currency transactions, all transactions above INR10 lakhs received by
non-profit organizations (NPOs) and suspicious transactions (Table II) to the FIU-India,
under the PMLA. The banks are obliged to furnish such transactions not only when they
are executed, but also when are attempted to be executed[11].
The significant requirement in India for furnishing of the items A and C is due to high
rate of tax evasion and voluminous counterfeiting of Indian currency (Bureau of
International Narcotics and Law Enforcement Affairs, 2013). Because terrorist groups
often use charities or NPOs as a source for financing their terror activities, India has also
amended its reporting obligation to include reporting of receipt of either cash or
non-cash transactions of value greater than INR10 lakhs and above by NPOs. The facts
reported above, under items A-C, often facilitate the analysis of suspicions reported
under STRs. The FIU-India is empowered[14] to oversee the reporting obligation of the
entities covered under PMLA and to impose fine in case of non-compliance. The failure

Venture capital funds

Collective investment schemes
including mutual funds
Associations regulated by
forward markets
commission**
Intermediary registered under
pension fund regulatory
development authority**
Recognized stock exchange**

Registrars to issue
Merchant bankers

Notes: * introduced through PMLA (Amendment) 2009; ** introduced through PMLA (Amendment) 2012
Source: FIU-India

Investment advisers

Portfolio managers

Non-banking financial
companies
Payment system operators*

Regional rural banks

Share transfer agents

Bankers to an issue
Trustees to trust deed

India post**

Hire purchase companies

Chit fund companies
Housing finance
institutions

Private Indian banks

Private foreign banks
Cooperative banks

Depositories and depository

participants
Custodian of securities
Foreign institutional investors
Credit rating agencies

Intermediaries
Stock brokers; sub-brokers

Underwriters

Insurance companies

Public sector banks

Authorized money
changers*

Financial institutions

Banking institutions

Registrar/Sub-registrar**
Real estate agent**
Dealers in precious
metals/stones/high-value
goods**
Private locker operators**

Casino*

Designated business or
profession

Suspicious
transaction
reporting
5

Table I.
Reporting entities
under PMLA

JMLC
18,1

Item

Report

Information furnished

Cash transaction reports

NPO transaction reports

Counterfeit currency report

STR

i. All cash transactions of the value of more than INR10

lakhs or its equivalent in foreign currency
ii. All series of cash transactions integrally connected to each
other which have been valued below INR10 lakhs or its
equivalent in foreign currency, where such series of
transactions have taken place within a month and the
aggregate value of such transactions exceeds INR10
lakhs[12]
iii. All transactions involving receipts by NPOs of value more
than INR10 lakh, or its equivalent in foreign currency[13]
iv. All cash transactions where, forged or counterfeit
currency notes or bank notes have been used as genuine
or where any forgery of a valuable security or a document
has taken place facilitating the transactions
v. All suspicious transactions whether or not made in cash

Table II.
Reports filed under
PMLA

to file an STR and other transactions, as mentioned above, would attract a monetary
penalty of not less than INR10,000, which may extend up to INR1 lakh for each failure.
The next aspect in the reporting process is the dissemination of financial information
between the FIU and the enforcement authorities. When information filed through the
above reports (Table II) is analyzed and FIU believes that material in their possession is
the proceeds of crime or an attempt of money laundering offence, it forwards the
information, and, on request, the information filed under other items, to the appropriate
authorities like Enforcement Directorate (ED), Central Board of Direct Taxes, Central
Board of Excise and Customs, Narcotics Control Bureau, Intelligence Bureau, Research
and Analysis Wing (R&AW), etc. These agencies further investigate and when they find
the likeliness to a money laundering offence/predicate offence underlying it, they
proceed to file the case for adjudication. Through PMLA, the ED is empowered[15] to
investigate the cases of money laundering and provisionally attach[16], seize[17] or
freeze[18] the property/record. After this, the enforcement directorate shall file a
complaint within 30 days[19] from the date of such an attachment/seizure/freezing, as
the case may be, with the concerned adjudicating authority. The adjudicating authority
when has the reason to believe that an offence of money laundering is committed, the
attachment, seizure, or property frozen is confirmed. Finally, when the offence is
proved, the material in their possession is confiscated[20]. An improvement is made
under the PMLA, where the confiscation is made independent[21] of the conviction in
cases where money laundering has been done by a person who has not committed the
predicate crime or where property has come to rest with someone who has not
committed any offence. So, as long as it is proved that predicate offence and/or money
laundering offence has taken place and the property in question is involved in money
laundering, even if there is no conviction, the property can be confiscated.
4. Literature review
A brief overview of the studies that analyzed the effectiveness of the STR regime and its
impact on the money laundering is discussed below. The studies also highlight the
limitations in evaluating the impact of AML outcome.

4.1 Role of STRs in assessing effectiveness

The whole objective of the exercise from the identification of the customer to monitoring
the transactions is to detect any suspicious incidences of money laundering and terrorist
financing and to report them to the FIU. The filing of such information renders more
help in the process of investigation by the enforcement personnel (Reuter and Truman,
2004). Thus, STR/Suspicious Activity Report (SAR) is an essential indicator of the
AML/CFT measures. The effectiveness of AML regime is measured through the
quantity and quality of the suspicious transactions reported.
Chaikin (2009) questioned the effectiveness of the Swiss STR system wherein
underreporting of suspicious transactions is observed as compared to the USA and the
UK and observed that few financial firms contributed to the reduction in the number of
STRs to the improvement in AML/CFT measures. This opinion was supplemented by
the study by Subbotina (2009), who noted that the decreasing number of STRs in the
Western regimes is an indicator of a better quality of the reports sent to the FIU.
Contradicting this, Chaikin (2009) argued that effective know-your-customer (KYC)
regime would result in increased number of STRs, at least initially, until the criminals
and money launderers realize that they might be subjected to disclosure reports if they
approach a financial intermediary. Russian federation too feels better as more STRs are
received from the banks, regardless of the quality and utility of information they contain
(Subbotina, 2009). But Subbotina (2009) attributes this to the negative reason, where
increasing number of the reports shows the banks intention to avoid mistakes and
underreporting. Failing to meet the reporting obligations would expose banks to legal
risk (Financial Services Authority, 2003), and thus reporting for the sake of avoiding any
such exposures would not serve the purpose and will not relieve the banks from their
moral and social obligation of implementing a meaningful, sound and effective national
AML/CFT regime. Defensive reporting only burdens the authorities with voluminous
reports, thus reducing the effectiveness of analysis and the investigation process even in
very deserved cases (Johnston and Carrington, 2006).
4.2 AML measurement issues
Measuring the effectiveness of money laundering regulations is a difficult task for
researchers. The effectiveness of the implementation can be assessed from different
perspectives. First thing is to look for the achievement of regulations, i.e. how much of
money laundered through financial institutions has been traced and confiscated? How
many of terrorist financial links have been traced and stopped prior to the transaction?
But it is difficult to assess this output, as there is no reliable information which
establishes the amount of money entering into informal or formal economy from illegal
markets (Harvey, 2004; Duyne et al., 2005).
The next approach is to consider the number and amount of fines that the financial
firms had avoided and the number of potential clients/transactions not accepted in the
process of KYC/AML compliance, or the lower number of non-compliance disclosures in
the media as an index. This approach too could not be used as one cannot provide
conclusive statistics on such data (Verhage, 2009). Few studies Duyne and de Miranda
(1999) for The Netherlands, Levi and Maguire (2004) and Fleming (2005) for the UK,
Chaikin (2009) for Switzerland and Verhage (2009) for Belgium attempted to assess the
impact of AML on crime reduction from various perspectives like filing and
dissemination of SAR, usage of SARs by law enforcement agencies, value of seizures

Suspicious
transaction
reporting
7

JMLC
18,1

and forfeitures and the number of convictions and confiscations to measure the
effectiveness. These studies showed that the impact of AML on money laundering was
minimal. However, this approach too has its limitations, i.e. the extent to which SAR
information is actually used by the law enforcement agencies (Fleming, 2005), the
process of investigation and action taken on it is unknown and hence the efficacy of the
system is unclear.
Thus, in short, the metrics/indicators to measure the effectiveness and efficiency of
AML regime is neither complete nor concrete due to lack of a proper reporting system
and conclusive statistics. This was observed by majority of the studies attempted to
measure effectiveness. Under such circumstances, it would be important to explore
less tangible/behavioral indicators such as the effects on cultures, groups and
individuals, including the behavior of financial services personnel (Levi and Maguire,
2004). Thus, the punitive and stringent regulations have to be imposed for reducing the
opportunities of money launderers by increasing the difficulties and costs of laundering,
based on the fact that there is an inverse relationship between the AML regulation and
the amount of money laundered (Harvey, 2004, Levi and Maguire, 2004). In Belgium, the
banks have adopted qualitative criteria such as observance of compliance rules and
results of internal and regulatory audits for evaluating their performance (Verhage,
2009). The FATF methodology 2013 was proposed to assess the outcome of all the
guideline issued, and for establishing the effectiveness of the AML/CFT system. It
proposed 11 immediate outcomes[22] that would result in if the guidelines are well
complied with and suggested to examine the resulted outcome against certain indicators
to verify whether the expected outcome is achieved or not. That in turn would establish
the effectiveness of the measures in place. It is probably the best way available to ensure
and measure the degree of effectiveness in view of the inability to establish a conclusive
number on the circulation of black money in the economy.
5. AML/CFT system in India an analysis
5.1 Methodology
It is a descriptive study to explore the outcome of AML process in India. The study used
the secondary data published in annual reports of FIU-India and FATF from 2006-2007
to 2011-2012. The main objective of the study is to evaluate STR as a preventive function
of AML regime. STRs enable enforcement agencies to investigate and analyze AML
crimes. The main variables considered for evaluating the effectiveness of reporting
system in India include, the number of STRs submitted, sectorial participation in STRs,
the diversification in the reasons for filing STRs and the dissemination rate. The
variables used are few due to limited availability of data, as agencies involved in AML
maintain confidentiality. The impact of the AML function is judged on the basis of
number of prosecutions and convictions and confiscation value.
5.2 Suspicious transactions reports in India
Table III provides details of STR revised, processed and disseminated in India from
2006-2007 to 2011-2012. During the study period of six years, number of STRs reported
has increased by almost 38 times, which is a significant increase within a short duration
after FIU coming into operation. It increased at a compound annual growth rate[23]
(CAGR) of 107 per cent during the period. Especially from 2009 onwards, there is a
notable increase in STRs. This indicates that the monitoring system in India is

Bank

STRs Received
FI Intermediary Total

2006-2007
437
88
292
2007-2008 1,183
288
445
2008-2009 2,826
841
742
2009-2010 7,394 1,655
1,018
2010-2011 12,287 7,006
1,405
2011-2012 14,949 14,712
1,656
Total
69,224

817
1,916
4,409
10,067
20,698
31,317

(%) Change Cumulative

STRs
STRs
in STR
STR
processed* disseminated growth growth rate
646 (79)** 391 (61)***
2,001 (96)
935 (47)
4,019 (89)
2,270 (56)
9,425 (89)
6,571 (70)
20,041 (92) 13,744 (69)
31,279 (95) 23,689 (76)
67,411 (93) 47,600 (71)

134.52
130.11
128.33
105.60
51.30

1.35
1.32
1.31
1.24
1.07

Notes: * includes STRs, brought forward from the previous year; ** STRs processed in percentage to
the STRs received; *** STRs disseminated in percentage to the STRs processed
Source: FIU-India

Suspicious
transaction
reporting
9
Table III.
STRs submitted by
banks, financial
institutions and
intermediaries

Number of STRs

becoming rigorous to the extent of detecting the accounts with suspicious nature. This
increase is justified by the fact that the compliance with AML regulatory norms
becoming stringent, where the regulators are coming up with the continuous penalties
on non-compliance firms. This might trigger the question of defensive reporting
wherein the banks and financial institutions might report whenever the slightest
suspicion comes up to avoid the sanctions. The increase can also be attributed to the
enhanced outreach programs by the FIU-India on the transaction reporting that
provides guidance to the financial sector on their reporting obligations, and by engaging
in extensive compliance monitoring. The growth rate of STRs is drastically decreasing
year-on-year (Table III and Figure 2) and thereby soon we expect the stagnation phase,
where the growth of STRs is arrested. The processing capacity of FIU-India also
increased from 79 per cent in 2006-2007 to 95 per cent in 2011-2012 (Figures 1 and 2).
The more number of STRs were filed by the banking institutions (56 per cent)
followed by other financial institutions (36 per cent) and intermediaries (8 per cent). The
cause of suspicion for filing the report is also diversified. Between 2006 and 2010
(Figure 3), the number of suspicions reported was more in the context of nature of
transactions (like doubtful source of funds, doubtful foreign remittances to
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0

STRs Received
STRS Processed*
STRs Diseminated

Note: *includes STRs, brought forward from previous year

Figure 1.
Number of STRs
received, processed
and disseminated

JMLC
18,1

10
Figure 2.
Year-on-year growth
rate of STR

Percentage change in Growth of STRs YoY

160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00

Percentage
Change in
Growth

Number of STRs

*Number of STRs - Suspicion Wise (during 2006-07 to 2009-10)

Figure 3.
Suspicion-wise
distribution of STRs

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

Identy of Client
Background of Client
Mulple Accounts
Acvity in the
Account
Nature of the
Transacons
Value of the
Transacons
Miscellaneous

Note: *One STR can have more than one type of suspicion

non-relatives, etc.) in an account (32 per cent). There was also higher number of
suspicions filed with respect to the value of transactions (26 per cent) and the nature of
activity (such as a sudden activity in the long remained dormant accounts, activity
inconsistent with the customer profile etc.) in an account (24 per cent). The least reported
were with regard to the identity and background of a client (3 per cent).
5.3 Disseminations of STRs
Once the STRs are received by the FIU, the next step in the chain is the analysis and
dissemination of information filed under STR. Since FIU has come into operation, until
2012, the FIU has processed 67,411 STRs (Table II and Figure 1), which is 97 per cent of
the total STRs received by the FIU. Of the processed STRs, FIU had disseminated 47,600
STRs to various law enforcement agencies, intelligence agencies and regulatory
authorities, which is approximately 71 per cent of the processed STRs. What happened
to the other 29 per cent of the processed STRs has not been not disclosed in the report.
The exact reasons for non-dissemination of STRs, like whether the STRs after analysis
are confirmed to be non-suspicious, or kept pending in need of further information, are
not known. However, what is much important here is the 71 per cent dissemination of
processed STRs, which may either point to the preciseness of the reporting entities in

detecting the suspicious activities and making sufficiently good quality reports, or the
FIU-India might be just passing the information from reporting entities to the
enforcement authorities, without much filtering through its own investigation and
analysis, as it is obvious that the FIU-India is severely understaffed[24]. Thus, the
enforcement authorities have received more number of STRs (67 per cent) followed by
intelligence agencies (32 per cent) for further enquiry Figure 4.
5.4 Convictions/confiscations
Since the enactment of PMLA, to date, there are no convictions or confiscation of the
assets[25]. Table IV gives the statistics related to the money laundering investigations
and prosecutions as on 2013. From the table, it cannot be inferred as to how many of
these investigations are triggered because of STRs, or made use of STRs in their
ongoing investigations, and also how many prosecutions are based on such
investigations. Thus, it cannot be inferred that if they are the output of the financial
disclosures by the reporting entities under PMLA or is it the direct outcome of the law
and order prevailing in the country, under the purview of PMLA, because there is no
disclosure by the various enforcement authorities in usage of STRs in their respective
investigation and subsequently prosecution of money laundering, or terrorist financing
and their associated predicate offences. However, when we look at the overall impact on
money laundering with the enactment of PMLA, the efficiency of the law enforcement

Suspicious
transaction
reporting
11

25,000
20,000
Total STRs
Disseminated

15,000

Law enforcement
agencies

10,000
5,000

Intelligence
agencies

0
2006
-07

2007
-08

2008
-09

2009
-10

2010
-11

2011
-12

Total STRs Disseminated

391

935

2,270

6,571

13,744

23,689

Law enforcement agencies

338

885

2,319

6,537

8,818

16,905

Intelligence agencies

60

49

90

362

5,523

10,905

Regulatory authories

30

34

41

128

127

225

Regulatory
authories

Note: One STR can be disseminated to more than one agency

No.

Item

No.

1
2
3
4
5

Number of ML cases registered for investigation

N umber of Provisional Attachment Orders (PAOs) issued
Number of PAOs confirmed
Values of properties under attachment
Prosecution complaints filed

1 561
197
162
INR35,737.3 million (USD65,000)
49

Source: FATF 8th Follow-Up Report on Mutual Evaluation of India 2013

Figure 4.
dissemination of
STRs

Table IV.
PMLA statistics as
on 30 April 2013

JMLC
18,1

12

authorities and the judicial process is questionable because though a large number of
cases were registered for investigation, only 3 per cent of such cases are undergoing
legal proceedings, and convictions for money laundering offences are yet to be achieved.
Also, only a minimal value (USD65,000) of the property is under attachment, which is an
insignificant number when compared with the illicit capital flight out of India, where
during 2004 to 2008 alone, India lost its assets at a rate of USD19 billion per year (Kar,
2010). A whooping sum of USD462 billion illicit capital was moved out of India from
1948 to 2008 (Kar, 2010). The confiscation of the value under attachment is yet to
crystallize. One has to accept that India, in the eight years of its PMLA brought into
force, has made progress in curtailing the money laundering, though the progress is not
satisfactory. The AML/CFT regime in India just started its way ahead and it still has to
go a long way to achieve tangible results.
6. Discussion
When we analyze impact of AML from the perspective of its prevention and
enforcement functions, we observe that prevention function has led to increase in the
number of reporting entities and coverage of transaction, resulting in exponential
growth of filed STRs, but at the same time the effect of AML is not felt from the
enforcement side, as no conviction is made under PMLA. This raises many questions
whether FIU-India is able to add additional value to the STRs received, thereby
disclosing the required financial intelligence that will really trigger the investigation at
the enforcement wing; to what extent the STR information is being used by the
enforcement personnel; to what extent their investigations are conducted; and whether
the judiciary has rightly dealt in prosecuting the cases. Also, whether the impact can be
realized if Indias administrative model of FIU is made more autonomous and receives
the investigative powers to deal with money laundering cases, needs further research.
The lack of autonomy with the structure of FIU-India (Sathye and Patel, 2007) affects the
process of AML implementation by hindering the flow of financial intelligence. In light
of the suggestions by International Monetary Fund and World Bank, and international
practices, the FIU must be an autonomous body, with the required administrative,
investigative and judiciary powers, to function effectively, as the present setup is
hindered by the high level of corruption, political interference and unreasonable delay in
disposing the cases. The advantage of such combo form FIU is the investigative and
judicial process can be immediately brought into play without any delay. It is beneficial
if such FIU is placed under enforcement wing or prosecutorial office to reap the benefit
of better access to crime information and investigation. Such FIU with policing and
judicial functions are already functioning in countries like the UK, Slovenia,
Mongolia[26], Germany[27], etc. Like the FIU-India, Slovenian FIU (OMLP) shares an
administrative model of FIU, which is also established under the ministry of Finance.
However, the OMLP also has the judicial powers to freeze transactions (for up to 72
hours) and search, seize and confiscate the proceeds of crime[28]. Republic of Slovenias
vulnerability to money laundering, for example, through activities such as drug
trafficking, organized car theft, fraud, tax evasion, illicit immigration, smuggling and
abuse of economic power is similar to that of Indias. Slovenia enacted the law on money
laundering in 1994 and amended it in 1995. OMLP has made a considerable progress in
enforcing AML wherein USD12,249,967 (Dokmanovic and Hristovski, 2005) and USD
1,167, 345[29] were temporarily seized during the period 1995-2002 and 2006-2011,

respectively. Six[30] cases were convicted for money laundering during 2006 and 2012.
This indicates that the progress of Slovenia in enforcing the AML is better than India. It
is also evident from the Basels AML index[31], where, of the 149 countries, Slovenia is
ranked 148th with a score of 3.3, whereas India is ranked 70th with a score of 5.95.
Political will is necessary not only in the enactment of laws but also to provide
support by providing sufficient budgetary resources on a continuous basis to the FIU
and other stakeholders to achieve its objectives. FIU-India has to be equipped in terms of
skilled staff in proportion to the expected flow of reports to and from the FIU. Also, there
is no feedback mechanism from the law enforcers on the outcome of the STRs to both the
FIU-India and the reporting entities. Thus, the reporting sector in India is not considered
as a partner in the fight against money laundering. In that case, the reporting entities
will not be in a position to improvise their process as they lack the outcomes of their
reports and hence they only perform to the extent they are compelled to do so. Learning
from past mistakes and successes are critical to the effective and efficient functioning of
AML regime (Fleming, 2005). Lack of feedback will keep the reporting entities in a
dilemma and might inculcate negative attitude towards compliance, which in turn will
lead to lapses in KYC implementation. The effectiveness of the preventive function of
AML is dependent on input from the law enforcement agencies (Financial Services
Authority, 2003). In India, more transparent methods are required for both enforcement
and prevention to have an efficient implementation of AML. The outcome of the
investigations should also be disclosed to the public, either through published reports or
media, to reap the impact of the AML regime.
7. Summary
The AML regime started in India with the enactment of PMLA 2002 that came into force
in 2005. The FIU-India is empowered with the overseeing of the reporting obligation
under the PMLA. The entities initially covered under PMLA were banking institutions,
financial institutions and other intermediaries like stock brokers, venture capital funds,
mutual funds, etc. Later it expanded to cover department of post, stock and commodity
exchanges and DNFBPs like real estate agents, sub-registrars, dealers in precious
metals and stones, etc. This study analyzed the effectiveness of AML regime in India
through the trends in STRs, prosecution and conviction rate and volume of confiscation.
The trends in STRs, from 2006 to 2012, revealed that:
the number of STRs has increased by almost 38 times with a CAGR of 107 per cent;
the share of STRs reported were banking sector (56 per cent), financial institutions
(36 per cent) and intermediaries (8 per cent); and
the share of suspicious activity recorded during 2006 and 2010: the nature of
transactions (32 per cent), value of the transactions (26 per cent), nature of activity
in the account (24 per cent) and identity and background of client (3 per cent).
As on 2012, FIU has disseminated 71 per cent of the processed STRs, a significant
number, which acknowledges the preciseness in detecting the suspicious activities or
transactions, although few in number considering the countrys potential exposure to
money laundering and terrorist financing risks, and accordingly the filing of quality
reports. Since the enactment of PMLA, the number of cases registered for investigation
under PMLA is very few, and the cases under prosecution is only 49. So far, there has
been no conviction and no confiscation of funds.

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8. Conclusion
The role of preventive function of AML regime has considerably improved, which is
evident from the significant increase in the number of STRs filed. Yet, the reporting
system of India is questionable as the number of STRs reported is relatively low
considering Indias high level of corruption, tax evasion, voluminous circulation of
counterfeit currency, drug trafficking, human trafficking and other illegal trades. The
impact of the PMLA and the other regulatory norms can only be assessed in the coming
years, based on the number of incidences of the money laundering and terrorist
financing activities. To realize the positive impact of the AML regime, the commitment
and also the cooperation of the stake holders, namely, reporting entities, regulators and
enforcement agencies as a single team, is highly essential. Reaching the target is an
uphill task until the loopholes in their strategies are rectified. As on now, the outcome is
still far from the desired outcome.
Notes
1. Article 3, Paragraph 1(b) in United Nations Convention Against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances, 1988.
2. Recommendation 16 of Financial Action Task Force on Money Laundering 1990 Report.
3. Recommendation 18 and 19 of Financial Action Task Force on Money Laundering 1990
Report.
4. Article 6 of COUNCIL DIRECTIVE of 10 June 1991 on prevention of the use of the financial
system for the purpose of money laundering (91/308/EEC).
5. Article 12 of COUNCIL DIRECTIVE of 10 June 1991 on prevention of the use of the financial
system for the purpose of money laundering (91/308/EEC).
6. Recommendation 15, 16, 17 and 18 of Financial Action Task Force on Money Laundering
1996 Report.
7. Recommendation 9 of Financial Action Task Force on Money Laundering 1996 Report.
8. Section 12 of PMLA 2002.
9. Amendment Section 2 of PMLA (2002) under PMLA (Amendment) 2009.
10. Amendment Section 2 of PMLA (2002) under PMLA (Amendment) 2012.
11. Section 12 (1)(b) of PMLA (Amendment) 2012.
12. Reserve Bank of India master circular (DBOD. AML. BC. No. 11/14.01.001/2012-13).
13. Rule 3(1)(BA) of Prevention of Money-laundering (Maintenance of Records of the Nature and
Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing
Information and Verification and Maintenance of Records of the Identity of the Clients of the
Banking Companies, Financial Institutions and Intermediaries) Amendment Rules, 2009.
14. Gazette of India (Extraordinary), Part-II, Section 3, Sub-section (i) Notification G.S.R. 440(E)
dated 1 July 2005.
15. Gazette of India (Extraordinary), Part-II, Section 3, Sub-section (i) Notification G.S.R. 441(E)
dated 1 July 2005.
16. Section 5(1) of PMLA 2002 and Amendment of Section 5(1) under PMLA (Amendment) 2012.
17. Section 17(1) of PMLA 2002.

18. Section 17(1)(A) of PMLA (Amendment) 2012.

19. Section 5(5) of PMLA 2002.
20. Section 8(6) of PMLA 2002.

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transaction
reporting

21. Section 8 (5) of PMLA (Amendment) 2012.

22. FATF Methodology 2013, page: 14-20.
23. Formula: CAGR (t0, tn) (V[tn]/V[t0])1/(tn-t0) 1.
24. Organization strength of FIU-India as on 31 March 2011 is 53 (includes 22 staff working on
contract basis) against the sanctioned strength of 75. Refer FIU-India annual report
2011-2012.
25. FATF Mutual Evaluation Report 2010 and FATF 8th Follow-Up Report on Mutual
Evaluation of India 2013.
26. www.mongolbank.mn/eng/listCMA.aspx?did4
27. www.bka.de/nn_195530/EN/TheBKA/Tasks/InvestigativeFunctions/investigativeFunctions__
node.html?__nnntrue
28. Council Framework Decision on money laundering, the identification, tracing, freezing,
seizing and confiscation of instrumentalities and the proceeds of crime of June 26, 2001.
29. OMLP annual report 2011.
30. Five cases during 2006-2011 (see OMLP annual report 2011) and one in 2012 (refer US state
department money laundering report 2013).
31. Indicates a countrys risk level in money laundering/terrorist financing based on its adherence
to AML/CFT standards. The scores are on the range of 0 (low risk) to 10 (high risk).
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About the authors
B. Viritha is a Research Scholar, Department of Banking Technology, School of Management,
Pondicherry University. Her area of interest is banking and financial system, and information
security in banks. Currently, she is working in the area of KYC and Money Laundering. B. Viritha
is the corresponding author and can be contacted at: b.virithareddy@gmail.com
Dr V. Mariappan is Associate Professor, Department of Banking Technology, School of
Management, Pondicherry University. Heearlier worked as Associate Professor, Vaikunth Mehta
National Institute of Cooperative Management, Pune. He was also a trainer for Cooperative and
Rural Banks. He has a teaching experience of 16 years and has published many articles of national
and international repute. His areas of interests are strategic finance, banking and bank marketing,
cyber crimes and IT laws. He is associated with project consultancy works of Government of
Kerala, Government of Tamil Nadu, NCDC, New Delhi, and BIRD, Lucknow.
Irfan Ul Haq is the Research Scholar in the Department of Banking Technology, School of
Management, Pondicherry University. He completed his masters in Finance and Control (MFC)
from Kashmir University. His area of research is banking, capital markets and derivatives.

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