Prevention of Money Laundering Act 2002 Overview and Key Provisions

Published on 22 September 2025 by
Prevention of Money Laundering Act 2002

The Prevention of Money Laundering Act (PMLA), 2002 is India’s central law aimed at preventing criminals from disguising illegally earned money as legitimate income. It came into effect on 1 July 2005. The Act is vital for the banking and financial sector because most illegal money flows through banks before being integrated into the economy.

What is the Prevention of Money Laundering Act (PMLA), 2002?

PMLA is a comprehensive legislation that defines money laundering, prescribes strict punishments, and lays down obligations for banks, financial institutions, and intermediaries. It empowers authorities to attach, freeze, and confiscate property obtained from the proceeds of crime. The law also aligns India with international commitments such as the Financial Action Task Force (FATF) standards.

Objectives of PMLA

The Act was framed with a vision to protect the financial system from misuse and ensure transparency in financial transactions.

  • Prevent and control money laundering in India.
  • Confiscate and seize property obtained through illegal means.
  • Punish offenders involved in laundering black money.
  • Ensure the integrity of banks and financial institutions.
  • Fulfill India’s global commitments to AML and counter-terrorist financing.
  • Provide for speedy investigation and trial through special courts.

What is Money Laundering?

Money laundering is the process of making illegally obtained money appear legitimate. Criminals use banks, shell companies, and financial channels to conceal the source of funds.

Stages of Money Laundering

StageMeaningExample
PlacementIntroducing illegal funds into the financial system.Depositing unaccounted cash into a bank.
LayeringMoving funds through complex transactions to hide origin.Wire transfers, offshore accounts, shell firms.
IntegrationRe-introducing laundered funds into the economy.Buying real estate, luxury goods, investments.

Important Provisions of PMLA

The Act contains several provisions that directly affect banks and financial institutions.

  • Section 3: Defines money laundering as involvement in any process connected with the proceeds of crime.
  • Section 4: Provides for rigorous imprisonment (3–7 years, up to 10 years for NDPS-related offences) and fine.
  • Section 5 & 8: Empower authorities to attach and confiscate property involved in laundering.
  • Section 12: Imposes obligations on reporting entities (banks, FIs, intermediaries) to maintain records, verify customers, and furnish information to FIU-IND.
  • Section 24: Burden of proof lies on the accused to prove assets are not proceeds of crime.
  • Section 45: Grants powers to Special Courts for trial of offences under PMLA.

Obligations of Banks and Financial Institutions

Banks are the first line of defence against money laundering. PMLA imposes strict compliance duties under Section 12. These obligations ensure that illegal funds are detected at the entry level itself.

  • Maintain records of all financial transactions above the prescribed limit.
  • Conduct Know Your Customer (KYC) checks to verify customer identity.
  • Furnish Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs) to FIU-IND.
  • Report cross-border wire transfers above the specified threshold.
  • Prohibit opening of anonymous or benami accounts.

Enforcement Agencies under PMLA

Several agencies are responsible for implementing and monitoring compliance with PMLA:

  • Enforcement Directorate (ED) – Investigates offences and attaches properties.
  • Financial Intelligence Unit – India (FIU-IND) – Collects and analyzes transaction reports from banks and FIs.
  • Adjudicating Authority – Decides whether attached property is involved in money laundering.
  • Special Courts – Conduct speedy trial of money laundering offences.

Punishments and Penalties under PMLA

ProvisionPunishment
Section 4Rigorous imprisonment of 3–7 years (up to 10 years in NDPS-related cases).
FineUnlimited fine depending on the offence.
ConfiscationProperties derived from proceeds of crime are seized and vested with the Central Government.

PMLA and its Importance for the Banking Sector

The banking system is the most vulnerable channel for money laundering. By enforcing strict reporting and KYC requirements, PMLA ensures that banks act as watchdogs of the financial system. For exam aspirants, it is important to understand:

  • PMLA creates the legal framework of Anti-Money Laundering (AML) in India.
  • It prescribes duties for banks in monitoring and reporting suspicious transactions.
  • It ensures accountability and imposes penalties for non-compliance.
  • It integrates with RBI’s KYC norms and other financial regulations.

FAQs

Q1: When did the Prevention of Money Laundering Act (PMLA) come into effect?

Ans 1: It was enacted in 2002 and came into force on 1 July 2005.

Q2: What is the main purpose of PMLA?

Ans 2: To prevent and control money laundering, confiscate proceeds of crime, and strengthen the financial system against illegal activities.

Q3: Who enforces PMLA in India?

Ans 3: The Enforcement Directorate (ED) is the primary agency, supported by FIU-IND, Adjudicating Authority, and Special Courts.

Q4: What is the punishment under PMLA?

Ans 4: Rigorous imprisonment of 3–7 years (up to 10 years in NDPS-related cases), along with fines and confiscation of property.

Q5: What are the obligations of banks under PMLA?

Ans 5: Banks must follow KYC norms, maintain records, report suspicious transactions (STRs/CTRs), and prohibit anonymous or benami accounts.

Q6: What are the three stages of money laundering?

Ans 6: Placement, Layering, and Integration.

Q7: Why is PMLA important for the banking sector?

Ans 7: Because banks are the main entry point for money laundering, and compliance ensures financial integrity and prevents misuse.

Q8: Which section defines the offence of money laundering?

Ans 8: Section 3 of PMLA defines the offence of money laundering.

Q9: Which section prescribes the obligations of reporting entities?

Ans 9: Section 12 prescribes the obligations of banks, financial institutions, and intermediaries.

Q10: Who decides whether attached property is involved in money laundering?

Ans 10: The Adjudicating Authority decides whether attached property is involved in money laundering.