The Role of Intermediaries in Preventing Money Laundering

Every time money changes hands in India’s financial markets – whether through a stock trade, a mutual fund investment, or a portfolio management service – there is an invisible compliance layer working in the background. That layer is largely built on the shoulders of intermediaries. Under the Prevention of Money Laundering Act, 2002 (PMLA), intermediaries are not just service providers – they are front-line gatekeepers against money laundering, and the law holds them to strict account.

Who is an intermediary under the PMLA? 🔗

The PMLA defines the term “intermediary” specifically in the context of financial and securities markets. Section 2(n) of the Act covers a wide range of entities, including stock-brokers, sub-brokers, share transfer agents, bankers to an issue, trustees to a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and any other entity associated with the securities market and registered under Section 12 of the SEBI Act, 1992. The definition was expanded by the 2013 amendment to also include intermediaries registered by the Pension Fund Regulatory and Development Authority (PFRDA) and recognised stock exchanges under the Securities Contracts (Regulation) Act, 1956.

In short, if an entity sits between an investor and the financial market, facilitates transactions, or manages assets on behalf of clients, it is likely to qualify as an intermediary under the PMLA. This places a significant portion of India’s financial ecosystem squarely within the Act’s ambit.

Why intermediaries matter in anti-money laundering 🔗

Money laundering typically involves three stages: placement (introducing illicit funds into the financial system), layering (disguising the trail), and integration (making the funds appear legitimate). Intermediaries – because they are the entry and movement points for funds – are uniquely positioned to detect suspicious activity at each stage. The Department of Revenue notes that the PMLA specifically imposes obligations on banking companies, financial institutions, and intermediaries to verify client identity, maintain records, and report information to the Financial Intelligence Unit – India (FIU-IND).

This is precisely why the law does not treat intermediaries as passive actors. Their position in the transaction chain gives them both the opportunity and the legal obligation to act as a check on illicit financial flows.

Core obligations of intermediaries under PMLA 🔗

Know Your Customer (KYC) and client due diligence 🔗

Before any client relationship begins, intermediaries are required to verify the identity of that client – this is the KYC obligation. But KYC is only the starting point. The PMLA and SEBI guidelines require intermediaries to conduct Client Due Diligence (CDD), which involves understanding the nature of the client’s business, the source of funds, and the purpose of the transactions. For higher-risk clients – such as politically exposed persons (PEPs) or clients from jurisdictions flagged by the Financial Action Task Force (FATF) – Enhanced Due Diligence (EDD) measures must be applied. As Lexology’s AML snapshot for India notes, SEBI-registered intermediaries typically apply intensified monitoring for high-risk customers, particularly those with unclear sources of funds.

Record maintenance 🔗

Under Section 12 of the PMLA, every reporting entity – including intermediaries – must maintain records of all transactions, along with documents establishing client identity, account files, and business correspondence. These records must be preserved for a minimum of five years. The Prevention of Money Laundering (Maintenance of Records) Rules, 2005 further specify that records must include all cash transactions above ₹10 lakh, as well as any series of connected transactions whose aggregate value crosses this threshold. The intent is clear: a complete and retrievable paper trail that enforcement agencies can use if an investigation becomes necessary.

Suspicious Transaction Reporting (STR) 🔗

Perhaps the most operationally significant obligation is the duty to file a Suspicious Transaction Report (STR) with FIU-IND. A suspicious transaction is broadly defined as one that gives rise to reasonable grounds for suspicion that it involves the proceeds of crime, appears unusually complex without any economic rationale, or has no apparent legitimate purpose. Under SEBI’s AML guidelines, upon identifying a suspicious transaction, the intermediary must immediately notify its Designated/Principal Officer with a detailed internal report specifying the client, the transaction, and the nature of the suspicion. Crucially, the client must not be informed that a report has been filed – maintaining confidentiality is a statutory requirement.

Appointment of a Principal Officer and Designated Director 🔗

Every intermediary is required to designate a Principal Officer at the management level, whose role is to coordinate AML compliance and serve as the point of contact with FIU-IND. SEBI’s Master Circular on AML/CFT additionally requires the appointment of a Designated Director – a senior official responsible for overall compliance with PMLA obligations at the board level. This dual-officer requirement ensures both operational and strategic accountability within the organisation.

SEBI’s evolving AML framework for intermediaries 🔗

SEBI has consistently tightened the AML framework for securities market intermediaries over the years. Its most recent Master Circular dated June 6, 2024 supersedes the 2023 guidelines and introduces several important additions. These include the requirement for group-wide AML/CFT programmes – meaning the obligations now extend to overseas branches and subsidiaries of Indian intermediary groups, subject to local laws. The 2024 guidelines also revised beneficial ownership thresholds used during CDD, bringing them more in line with FATF recommendations.

The SEBI guidelines also mandate that senior management establish formal written policies covering client acceptance, client identification procedures, risk management, and transaction monitoring during the CDD process. All staff must be trained on and made aware of these internal policies – a recognition that AML compliance is not just a legal or compliance department function but an organisation-wide responsibility.

Intermediaries as “reporting entities” under PMLA 🔗

The 2012 amendment to the PMLA introduced the concept of a “reporting entity” – defined under Section 2(wa) as a banking company, financial institution, intermediary, or any person engaged in a designated business or profession. This consolidation brought intermediaries formally under a single umbrella alongside banks and financial institutions, unifying their compliance obligations. The practical implication is that all intermediaries, regardless of size or type, are now subject to the same core set of record-keeping, reporting, and due diligence obligations that apply to banks.

Penalties for non-compliance 🔗

The PMLA does not treat compliance failures lightly. Under Section 13 of the Act, if the Director of FIU-IND finds that a reporting entity or its officers have failed to meet their obligations under Chapter IV (which covers KYC, record maintenance, and reporting), the Director can issue written warnings, direct specific corrective action, mandate periodic compliance reports, or impose a monetary penalty. The penalty for each failure can range from ₹10,000 to ₹1 lakh. Repeated or systematic non-compliance can also attract prosecution.

Importantly, Section 14 of the PMLA provides a safe harbour to intermediaries: no civil or criminal proceedings can be initiated against any banking company, financial institution, or intermediary for furnishing information in good faith to the relevant authority. This provision is designed to remove the fear of client litigation as a barrier to reporting suspicious transactions.

The broader picture: intermediaries and financial market integrity 🔗

India’s financial markets are large, complex, and increasingly interconnected with global capital flows. The FATF has evaluated India’s AML/CFT framework, and India’s ability to demonstrate effective gatekeeping by its intermediaries is a critical component of that assessment. India’s AML compliance framework brings together RBI guidelines for financial institutions, SEBI guidelines for securities market intermediaries, and IRDAI guidelines for the insurance sector – all operating under the overarching umbrella of the PMLA. Intermediaries, sitting at the intersection of all these flows, are thus central to whether India’s financial system can credibly claim to be free of laundered money.

The compliance burden is real – KYC infrastructure, trained staff, technology for transaction monitoring, and reporting systems all require investment. But these costs are the price of operating in a regulated market that enjoys trust. An intermediary that corners its compliance obligations does not just avoid penalties; it actively contributes to a financial ecosystem that is safer for all legitimate participants.

What do you think? Given that intermediaries are required to file Suspicious Transaction Reports without informing the client, how should they balance their duty of confidentiality to regulators against the trust-based relationship they maintain with their clients? And as SEBI’s AML guidelines become increasingly demanding, do smaller intermediaries have the operational capacity to meet these obligations without regulatory support or simplified compliance pathways?

References

1. https://www.indiacode.nic.in/handle/123456789/2036?view_type=search
2. https://fiuindia.gov.in/files/AML_Legislation/pmla_2002.html
3. https://www.dor.gov.in/overview-prevention-of-money-laundering
4. https://www.fatf-gafi.org/
5. https://www.lexology.com/library/detail.aspx?g=051102c5-9058-43c8-99c0-9c1def734dc4
6. https://fiuindia.gov.in/files/FAQs/faqs.html
7. https://www.lexology.com/library/detail.aspx?g=30bcfb88-04a5-46a6-879f-18cdf5e41c94
8. https://nsdl.co.in/downloadables/pdf/2024-0077-_Policy-SEBI_Master_Circular_on_Guidelines_on_AML_Standards_and_CFT_Obligations_of_Securities_Market_Intermediaries_under_the_PMLA_2002_and_Rules_frame.pdf
9. https://disputeresolution.cyrilamarchandblogs.com/2025/04/expanding-the-regulatory-framework-deep-dive-into-sebis-new-aml-cft-guidelines/
10. https://blog.ipleaders.in/prevention-of-money-laundering-act-pmla-2002/