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Introduction
Money laundering is the process by which criminals attempt to hide and disguise the true origin and ownership of the
proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds.
The phrase money laundering covers all methods used to change the identity of illegally obtained money so that it
can be used for legitimate purposes. The term is also used when the funds are used for terrorist financing though the
origin of the funds may be legitimate.
Money laundering includes the proceeds from drug trafficking and other criminal activities such as armed robbery,
tax evasion, smuggling, prostitution, terrorism, arms dealing, fraud, forgery and counterfeiting, bribery and
corruption.
Laundered money passes through the financial system and therefore, by definition, passes through banks. Hence,
the banking sector is often the focal point for anti-money laundering initiatives. The ability to launder the proceeds of
criminal activity through the financial systems of the world determines the success of criminal operations, and
therefore India, as one of the world's emerging financial markets, has a vital role to play in combating money
laundering.
Money laundering is a major threat to financial institutions and the economic stability of entire countries.
Governments worldwide have introduced legislation to prevent it, including defining of specific money laundering
offences and have legally imposed requirements on institutions operating in their jurisdictions. The Prevention of
Money Laundering Act was passed by the Indian Parliament in 2002. Banks, Financial Institutions and other
intermediaries becoming involved in money laundering offences could face prosecution under PMLA leading to
reputational and other risks.
The guidance notes cover the salient aspects of the RBI Guidelines on KYC standards and AML measures and
obligations of banks under the Prevention of Money Laundering Act, 2002 (PMLA) which have come into force on
July 1, 2005.
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Customers are better protected if banks are able to protect themselves against criminal activity. Failure to prevent
the laundering of the proceeds of crime permits criminals to benefit from their actions, thus making crime an
attractive proposition.
Adherence to AML policies and procedures should also enhance the fraud prevention measures that banks take to
protect themselves and their genuine customers from losses