The Role of AML Software in Automating AML Compliance for DNFBPs in India

With the growing significance of Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and Counter-Proliferation Financing (CPF) compliance, it is essential for businesses to develop and adopt a comprehensive AML/CFT/CPF program and ensure its effective implementation. AML software solutions act as strategic tools that help in the smooth, streamlined, and secure implementation of the AML/CFT/CPF program.

This blog explores the function of AML software in automating and optimising the AML/CFT/CPF compliance process for Designated Non-Financial Businesses and Professions (DNFBPs) operating in India. For this purpose, the blog first discusses the meaning and types of DNFBPs and the Indian AML/CFT/CPF regulatory framework applicable to them. Subsequently, the blog elaborates on how AML software solutions can automate and enhance the AML/CFT/CPF compliance process for DNFBPs.

The Role of AML Software in Automating AML Compliance for DNFBPs in India

Indian AML/CFT/CPF regulatory regime needs thoughtful navigation by DNFBPs. AML software automates the AML/CFT/CPF compliance process, which may be time-consuming or expensive when done manually. AML software can analyse large amounts of data in real time, to ensure that no element linked with money laundering (ML), terrorism financing (TF), or proliferation financing (PF) enters or misuses the DNFBP.

To understand the role of AML software in the AML/CFT/CPF compliance process in detail, let’s first understand the meaning and types of DNFBPs and the Indian AML/CFT/CPF regulatory regime applicable to them.

DNFBPS in India and AML Compliance Requirements

Definition of DNFBPs

In India, entities that are required to comply with AML/CFT/CPF laws are referred to as ‘Reporting Entities’ under the Prevention of Money Laundering Act, 2002 (PMLA). The definition of ‘Reporting Entities’ under PMLA includes certain designated businesses and professions from the non-financial sector.

DNFBPs are those non-financial sector entities that form a major portion of the global economic system. They have been brought within India’s AML/CFT/CPF framework to protect them from the risks of ML, TF, and PF.

 DNFBPs covered under PMLA, 2002

The following DNFBPs are considered ‘Reporting Entities’ under the PMLA and thus subject to AML/CFT/CPF compliance obligations in India:

• Real Estate Agents

This category includes any person who provides services for the sale and purchase of real estate and has an annual turnover of ₹20 Lakhs or more.

• Dealers in Precious Metals and Stones and Other High Value Goods:

This includes dealers in precious metals such as gold, platinum, palladium, or rhodium and precious stones such as diamond, emerald, ruby, sapphire, etc., if they engage in cash transactions with a customer equal to or above Rupees 10 lakh, carried out in a single transaction or in several linked operations.

• Entities Involved in Storing, Safeguarding, and Retrieving Records of Certain Documents

This category includes entities involved in storing, safeguarding, and retrieving records of documents related to transactions in a DNFBP, the identity of their clients and beneficial owners, as well as account files and business correspondence related to their clients.

• Safekeeping and Administration of Cash and Liquid Securities

Persons engaged in safekeeping and administration of cash and liquid securities on behalf of other persons.

• Trust and Company Service Providers

This category of entities includes entities conducting activities such as acting as formation agents of companies or Limited Liability Partnerships (LLPs) and providing them with registered offices, business addresses, accommodations, etc. It also includes persons acting as or arranging for another person to act as a director or secretary of the company, a partner of a firm, a trustee of a trust, or a nominee shareholder of another person.

• Practicing CA, CS, and CWA

Chartered Accountants, Company Secretaries, and Cost and Works Accountants are considered DNFBPs when they provide services such as buying and selling of immovable property, managing clients’ money, security or other assets, managing clients’ bank, savings or securities accounts, etc.

• Casinos

Persons carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casinos;

AML/CFT/CPF Regulatory Framework for DNFBPs in India

Key AML Laws, Regulations, and Guidelines Applicable to DNFBPs in India

Key AML Laws, Regulations, and Guidelines Applicable to DNFBPs in India

• Prevention of Money Laundering Act, 2002 (PMLA): As the principal AML law of India, PMLA lays the foundation for investigating and punishing offences related to money laundering. It also provides AML compliance requirements for certain ‘Reporting Entities’, which includes specified DNFBPs.
• Prevention of Money Laundering Rules (Maintenance of Records) Rules, 2005: These rules provide for a risk-based approach, internal policy and controls, KYC, CDD, sanctions, reporting obligations, and record-keeping requirements for ‘Reporting Entities’ in India.
• Laws Related to the PMLA: includes those that are associated with it
  • The Unlawful Activities (Prevention) Act, 1967
  • Weapons of Mass Destruction and Their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005
  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 The Benami Transactions (Prohibition) Act, 1988
  • Sector-specific AML Guidelines Issued by Competent Authorities, such as the Directorate General of India-Indirect Taxes and Customs
  • The Indian Penal Code, 1860
  • Code of Criminal Procedure, 1973
  • The Narcotic Drugs and Psychotropic Substances Act, 1985
• Directives and Guidelines Issued by Regulatory Bodies
  • Guidelines for Reporting Entities (Real Estate Agents) under the Prevention of Money Laundering Act, 2002
  • AML/CFT Guidelines for Reporting Entities (Dealers in Precious Metals and Precious Stones) under the Prevention of Money Laundering Act, 2002
  • International Financial Services Centres Authority (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022 (IFSCA Guidelines)
  • AML/CFT Guidelines for Reporting Entities providing services related to Virtual Digital Assets
  • AML & CFT Guidelines for Professionals with Certificates of Practice from ICAI, ICSI, and ICMAI
  • Master Circulars issued by the Reserve Bank of India
  • Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism Obligations of Securities Market Intermediaries

Key Regulatory Bodies Regulating AML/CFT/CPF Compliance for DNFBPs in India

• Financial Intelligence Unit-India (FIU-India)
• Ministry of Finance
• Reserve Bank of India
• Security Exchange Board of India
• Insurance Regulatory and Development Authority of India
• International Financial Services Centres Authority
• Enforcement Directorate

How AML Software Can Help Automate AML Compliance for DNFBPs in India

AML software is designed to carry out multiple tasks related to the AML/CFT/CPF program to help DNFBPs automate their compliance obligations. By automating compliance, DNFBPs can avoid issues related to conducting AML/CFT/CPF processes manually, such as data not being centralised, slow progress in the completion of compliance tasks, inability to monitor transactions in real time, and high costs of compliance.  The components of the AML/CFT/CPF program and how they can be automated through AML software are discussed below.

• Streamlining KYC Processes

Know Your Customer (KYC) is a key component of the Customer Due Diligence (CDD) requirements under the PMLA as well as the IFSCA Guidelines. KYC involves the verification of the customer’s identity and facilitates Customer Risk Assessment (CRA). AML software optimises the KYC process in the following ways:

• • AML software enables the KYC process to be carried out digitally by collecting customer information online and validating it through government databases electronically or through reliable third-party aggregators.
  • AML software allows auto-filling, pre-filling, or auto-capturing of customer information, reducing the scope of manual errors or time lags. This allows for a smooth customer onboarding experience.
  • AML software ensures that KYC information remains secure from data breaches.
  • AML software enables re-KYC as well, that is, updating customer information when the risk profile or information regarding a customer changes.

• Efficient Screening

Screening means matching customers’ names with sanctions, Politically Exposed Persons (PEP), and adverse media lists. Sanctions screening involves screening the following sanctions lists:

• • UN Sanctions
  • Sanctions List issued by the Ministry of Home Affairs (MHA) for Unlawful Associations, Terrorist Organisations, and Individual Terrorists
  • Other Relevant Sanctions Lists

Screening enables DNPBPs to make informed decisions regarding ML, TF, or PF risks associated with an existing or potential customer. AML compliance can be elevated through screening software in the following ways:

• • Screening software is easy to use, regularly updated, and provides features such as bulk screening and customisability to suit the needs of different DNFBPs
  • Screening software is integrated with fuzzy matching algorithms to help DNFBPs get accurate results by minimising discrepancies caused by variations in language and phonetic differences
  • It provides instant alerts whenever there is a match while conducting ongoing monitoring
  • AML software uses advanced algorithms and machine learning to minimise false positives, which allows DNFBPs to focus on genuine risks and avoid unnecessary alerts

• Comprehensive Risk Assessment

A risk-based approach forms the basis of an AML/CFT/CPF program and is essential for DNFBPs to adopt under the AML/CFT/CPF laws of India. A risk-based approach necessitates analysing ML, TF, and PF risks a DNFBP faces and adopting risk mitigation methods accordingly.

Such risk assessment can be automated through AML software in the following ways:

• • AML software enables Customer Risk Assessment (CRA) through dynamic risk scoring based on pre-determined factors such as geography-related risks, product-related risks, delivery channel-related risks, etc. After CRA, DNFBPs can adopt CDD, enhanced due diligence (EDD), or simplified due diligence (SDD) according to the customer’s risk rating.
  • AML software helps with the conducting of Enterprise-Wide Risk Assessments (EWRA) through tracking and monitoring risk factors to ensure that risk mitigation measures are relevant and customised to the needs of the DNFPBs.

• Round-The-Clock Transaction Monitoring

Transaction monitoring is necessary to ensure that DNFBPs detect and report suspicious transactions to FIU-IND. AML software makes the transaction monitoring process more efficient in the following ways:

• • AML software enables the setting of transaction thresholds and real-time monitoring of transactions.
  • AML software can check for unusual transactions if they do not match customer profiles or historical data related to the customer.
  • AML software can detect suspicious transactions through set parameters based on red flags that indicate the occurrence of ML, TF, or PF.

• Continuous Ongoing Monitoring

Transactions monitoring, ML/TF/PF risk monitoring, or customer risk monitoring is not a one-time process. Monitoring needs to occur on an ongoing basis to ensure that ML, TP, or PF risks do not slip through the cracks. AML software helps in ongoing monitoring in the following ways:

• • AML software detects ML, TF, and PF risks on a real-time basis based on evolving ML, TF, and PF typologies
  • AML software allows for configurability and customisation of monitoring based on the nature and size of the DNFBPs and their risk appetites.

• Seamless Regulatory Reporting

It is mandatory for DNFPBs to submit certain reports to FIU India. Such reports include Suspicious Transaction Report (STR), Cash Transaction Report (CTR), Counterfeit Currency Report (CCR), etc, depending on the type of business it operates. These reports need to be submitted through the FINnet 2.0 Portal of FIU-India. AML software makes this reporting process seamless in the following ways:

• • AML software automatically prepares and generates the required reports in formats as prescribed by FIU-IND.
  • AML software can sift through large amounts of data to detect suspicious transactions, which may take time if done manually.
  • Integrated with the type of business the DNFBPs engages in, the AML software auto-captures records from name screening, KYC, transactions monitoring and other components to comprehensively prepare the required reports.
  • AML software is configured to be updated with regulatory deadlines and set reminders for submission of the required reports so that no compliance obligation is missed.

• Robust Record-Keeping

The Prevention of Money Laundering Rules (Maintenance of Records) Rules, 2005, as well as IFSCA Guidelines, require DNFBPs to maintain specific documents as part of their AML/CFT/CPF programs. These documents include those collected during the KYC process, transaction records, etc. AML software automates the record-keeping function in the following ways:

• • AML software automates the collection and retention of the required documents digitally and securely. Automated record-keeping makes it easier for DNFBPs to retrieve information whenever required by regulatory authorities.
  • AML software is regularly updated to keep up with the dynamic AML/CFT/CPF record-keeping requirements, including the time period for which such records must be maintained.
  • The documents maintained can also be used in other processes, such as risk assessment and ongoing monitoring. AML software allows seamless integration of all AML processes through centralised software

• Thorough Independent Audits

Mandated under AML/CFT/CPF laws of India, regular independent audits help identify and remove gaps in the AML program of a DNFB. AML software helps DNFBPs prepare for an independent audit in the following ways:

• • AML software keeps a detailed log of all KYC information, screening processes, risk assessments, and transaction monitoring-related activities. This data is crucial for demonstrating compliance in the event of an audit.
  • AML software can generate customised reports for auditors as required to identify any potential lapses.
  • AML software can help keep a record of all AML audits and check the progress of measures taken to rectify the gaps identified in AML audits.

Conclusion

AML software is a powerful tool for DNFBPs in India and enables them to efficiently meet their AML/CFT/CPF compliance obligations. By automating key components of the AML/CFT/CPF program, DNFBPs can reduce the risk of non-compliance, avoid fines, and maintain the integrity of their operations. Therefore, adopting AML software is a necessity for DNFBPs seeking to protect themselves from ML, TF and PF risks.