CMA Final · Corporate and Economic Laws

Laws and Regulations related to Anti-Money Laundering: formula sheet

Full chapter guide

Key formulas

Three stages of money laundering: Placement → Layering → Integration; Placement puts cash into the system, layering hides the trail, integration returns the money as apparently clean wealth. This is a descriptive model, not a legal test.
Section 3 activities: Concealment | Possession | Acquisition | Use | Projecting as untainted | Claiming as untainted; The Explanation lists these six. Involvement in one or more is enough, in any manner whatsoever.
Who is covered by Section 3: Attempts to indulge | Knowingly assists | Knowingly is a party | Is actually involved; Direct or indirect attempts are covered. The word knowingly applies to assisting and being a party.
Continuing activity: Offence continues until the person stops directly or indirectly enjoying the proceeds; Enjoyment is by concealment, possession, acquisition, use, projecting or claiming as untainted property.
Punishment (Section 4): Rigorous imprisonment: 3 years minimum, up to 7 years, plus fine; up to 10 years for paragraph 2 of Part A offences; The five lakh rupee fine ceiling was omitted from 15-2-2013, so the fine has no stated upper limit in the text.
Basic punishment: Rigorous imprisonment: minimum 3 years, maximum 7 years, AND fine; Imprisonment and fine both apply. The imprisonment is rigorous, not simple.
Proviso (paragraph 2 of Part A of the Schedule): Rigorous imprisonment: minimum 3 years, maximum 10 years, AND fine; Only the upper limit changes from seven to ten years. The minimum is unchanged.
Fine: Liable to fine; no maximum stated in the section; The words 'which may extend to five lakh rupees' were omitted w.e.f. 15-2-2013.
Cognizance of Section 4 offence: Only on written complaint by the Director or an authorised officer (Section 45, second proviso); The officer must be of the Central or a State Government, authorised in writing by the Central Government.
Who can attach (Section 5(1)): Director, or officer not below Deputy Director authorised by the Director; Reason to believe must be recorded in writing and based on material in his possession.
Two conditions for provisional attachment: (a) person possesses proceeds of crime AND (b) likely to be concealed, transferred or dealt with so as to frustrate confiscation proceedings; Both conditions must be met.
Duration of provisional attachment: Not exceeding 180 days from the date of the order; Days when a High Court stay is in force are excluded, and a further period not exceeding 30 days from the order vacating the stay is counted.
First proviso: pre-condition: Report to Magistrate under Section 173 CrPC, or complaint before Magistrate or court for cognizance of the scheduled offence, or similar report or complaint under a foreign corresponding law; Required before an attachment order, subject to the second proviso.
Second proviso: urgent attachment: Attachment allowed notwithstanding first proviso if non-attachment is likely to frustrate any proceeding under the Act; Reasons must be recorded in writing.
Procedure after attachment (Section 5(2) and 5(5)): Copy of order and material to Adjudicating Authority in sealed envelope immediately; complaint to Adjudicating Authority within 30 days of attachment; Do not mix up the immediate forwarding with the 30-day complaint.
Cessation of attachment (Section 5(3)): Order ceases on expiry of the period in Section 5(1) or on the date of an order under Section 8(3), whichever is earlier; Attachment is temporary.
Enjoyment of immovable property (Section 5(4)): Person interested in enjoyment of attached immovable property is not prevented from such enjoyment; Person interested includes all persons claiming or entitled to claim any interest in the property.
Foreign property (Section 60(1)): Special Court, on application by Director or Administrator, may issue a letter of request to a court or authority in a contracting State; Applies where property under a Section 5 attachment is suspected to be in a contracting State.
Section 12(1)(a): transaction records: Maintain a record of all transactions so that individual transactions can be reconstructed; The test is reconstruction. The record must be good enough to rebuild each transaction.
Section 12(1)(b): reporting to the Director: Furnish prescribed information on transactions, attempted or executed, within the prescribed time; Attempted transactions are covered. Nature, value and time are fixed by rules (Section 73(2)(i)).
Section 12(1)(e): client records: Keep identity documents of clients and beneficial owners, account files and business correspondence; All four items matter: client ID, beneficial owner ID, account files, correspondence.
Section 12(3): retention of transaction records: 5 years from the date of transaction between client and reporting entity; The clock runs from the transaction.
Section 12(4): retention of client records: 5 years after the business relationship has ended or the account was closed, whichever is later; The clock runs from the end of the relationship. Do not mix it up with Section 12(3).
Section 12(2): confidentiality: Information maintained, furnished or verified is kept confidential, save as otherwise provided under any law; The exception is only where another law provides otherwise.
Section 11A(1): modes of identity verification: Aadhaar authentication (banking company), Aadhaar offline verification, passport, or other officially valid document notified by the Central Government; Other reporting entities may be allowed Aadhaar authentication by notification, after consulting UIDAI and the regulator.
Section 11A(3) and (4): voluntary choice and no storage: Mode of identification is the client's voluntary choice; no denial of service for lacking Aadhaar; core biometric information and Aadhaar number not stored; Storage bar applies where authentication or offline verification is used.
Section 12AA(1): enhanced due diligence before a specified transaction: (a) Aadhaar authentication of identity; (b) examine ownership and financial position, including source of funds; (c) record purpose and intended nature of the relationship; Done before each specified transaction commences.
Section 12AA(2)-(4): Client fails conditions: transaction not allowed. Suspicious: increase future monitoring. EDD information kept 5 years from the date of transaction; Specified transactions: cash withdrawal or deposit above a prescribed amount, forex transactions above a prescribed amount, high value imports or remittances, and other prescribed high-risk transactions.
Authorities (Section 49): Central Government appoints authorities; may authorise Director to Assistant Director rank to appoint authorities below Assistant Director; Powers are exercised subject to conditions and limitations imposed by the Central Government.
Arrest (Section 19): Reason to believe (recorded in writing) + material in possession → arrest; inform grounds; produce within 24 hours; The 24 hours exclude journey time from the place of arrest to the court. A copy of the order and material goes to the Adjudicating Authority in a sealed envelope immediately after arrest.
Director's directions on reporting entities (Section 13): Warning | specific instructions | periodic reports | penalty of ₹10,000 to ₹1,00,000 for each failure; Applies to the reporting entity, its designated director on the Board or any employee. The penalty is for each failure.
Special Courts (Sections 43-44): Court of Session designated by Central Government in consultation with Chief Justice of the High Court; Trial of the Section 4 offence and connected scheduled offence is by the Special Court for the area where the offence was committed. Trial follows Court of Session procedure.
Co-ordination Committee (Section 72A): Constituted by Central Government by notification; Purposes: operational co-operation, policy co-ordination, consultation, developing AML/CFT policy, and any other notified matter.
Interconnected transactions (Section 23): If one or more interconnected transactions are proved to involve money-laundering, the rest are presumed to be part of them unless otherwise proved; Applies for adjudication or confiscation under Section 8 or for trial. The proof is to the satisfaction of the Adjudicating Authority or Special Court.

Quick revision

Section 4 punishment: rigorous imprisonment of at least three years, up to seven years, plus fine.
The seven-year upper limit becomes ten years where the proceeds relate to an offence under paragraph 2 of Part A of the Schedule.
The fine under Section 4 has no fixed upper cap, since the earlier five lakh rupee limit was omitted from 15 February 2013.
Section 5: the Director or an officer not below Deputy Director may provisionally attach property, recording reasons in writing.
Provisional attachment lasts up to 180 days from the date of the order.
The attaching officer must forward the order and material to the Adjudicating Authority in a sealed envelope and file a complaint within 30 days.
Time during which the High Court stays proceedings is excluded from the 180 days, plus up to 30 days after the stay is vacated.
A person interested in attached immovable property is not prevented from enjoying it.
Section 23: if some inter-connected transactions are proved to be laundering, the rest are presumed part of them unless proved otherwise.
Section 44: the Special Court for the area tries Section 4 offences and connected scheduled offences, following Court of Session procedure.
Section 60 covers attachment and confiscation where property is in a contracting State, through a letter of request.
Section 72A: the Central Government may constitute an Inter-ministerial Co-ordination Committee by notification.

Common mistakes

Saying all three stages must be proved for the offence. Fix: Remember that the stages are a model. Section 3 is met by involvement in even one listed activity.
Limiting the offence to concealing money. Fix: Learn all six activities: concealment, possession, acquisition, use, projecting and claiming as untainted property.
Saying the maximum is ten years in every case. Fix: Treat seven years as the default. Ten years applies only for proceeds relating to offences under paragraph 2 of Part A of the Schedule.
Raising the minimum to seven years under the proviso. Fix: The proviso replaces only the words 'which may extend to seven years'. The minimum remains three years.
Treating attachment as confiscation. Fix: Remember attachment is provisional and ceases after 180 days or earlier on a Section 8(3) order. Confiscation is the final vesting in the Central Government.
Saying any police officer or Inspector can attach property. Fix: Under Section 5(1), only the Director or an authorised officer not below Deputy Director can attach.
Saying all records are kept for five years from the date of transaction. Fix: Client identity records and account files run five years from the end of the relationship or closure of the account, whichever is later.
Saying a bank can refuse service to a client who has no Aadhaar number. Fix: Under Section 11A(3), the mode is the client's voluntary choice and no one is denied services for not having Aadhaar. Passport or another notified officially valid document can be used.
Saying the Section 72A Committee investigates or prosecutes. Fix: Remember it only coordinates across departments and agencies, and shapes AML/CFT policy.
Treating the 24 hours for production before a court as including travel time. Fix: Add that the time needed for the journey from the place of arrest to the court is excluded.

Exam tips

Write the Section 3 wording closely: attempts, knowingly assists, knowingly a party, actually involved. Examiners reward precise phrasing.
In case scenarios, label each fact with a stage and with a Section 3 activity. Two labels per fact earn more marks.
Always mention the continuing-activity Explanation when the question asks whether the offence is complete or ongoing.
Do not quote section numbers beyond Sections 3 and 4 unless you are sure of them.
For MCQs, eliminate options that require all three stages or limit the offence to concealment.
Learn the numbers as a pair: 3 to 7 generally, 3 to 10 under the proviso. Examiners test the maximum, so check which case the question describes.
In a 14-mark answer, link Section 3 (offence), Section 4 (punishment) and Section 45 (cognizance, bail) in that order.
Write 'rigorous imprisonment' and 'and also fine' exactly. Marks are lost for 'or fine'.