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Securities Market Under PMLA

Money laundering poses a major threat to the integrity of financial systems worldwide. In India, the securities market, with its immense size and liquidity, is vulnerable to misuse for laundering prohibited funds. However, strong anti-money laundering (AML) regulations are in place to detect and curb this menace. 

In this article, we will learn how these criminals exploit the securities market and the anti-money laundering (AML) framework in India. 

Read on to understand the money laundering risks in securities markets and how Indian regulators tackle them.

Introducing the problem of money laundering 

Money laundering is when people try to make illegally obtained money look like it came from a legal source. They do this by moving the money around differently so that no one can easily tell where it came from. Once the money looks like it came from a legal source, it can be used like normal money in the regular banking system.

India’s capital markets offer immense scope for laundering money due to factors like:

  • Large trading volumes make detection difficult
  • Ability to quickly convert cash into securities
  • Access to foreign funds and offshore structures
  • Use of opaque financial instruments

Money laundering is a serious issue that can harm the economy and society as a whole. Criminals and terrorists often use illegal funds to buy assets, which can destabilise markets and even cause financial crises. 

Money laundering also leads to a substantial loss of tax revenue, which can hurt public services and infrastructure. We must take this issue seriously and prevent it from happening to ensure a safe and prosperous future.

Regulating securities markets under PMLA

India has a law called the Prevention of Money Laundering Act (PMLA) that helps prevent illegal activities like money laundering that can harm the economy. This law requires people involved in the stock market, like stock brokers, portfolio managers, and investment advisors, to follow some rules. 

They need to identify that their clients can keep records to ensure they are not involved in illegal activities. This helps to keep the stock market safe and fair for everyone.

Main PMLA provisions for securities market intermediaries

1. Know your customer norms

Companies that work as mediators between clients and service providers need to ensure that they check their clients’ identity and address before starting to work with them. 

When dealing with people who hold prominent public positions or are related to them, extra care is needed to ensure that everything is legitimate. This is known as enhanced due diligence.

2. Identifying beneficial ownership

It is important to know who the actual owner of a client account is. This helps to track the flow of funds and identify the actual beneficiaries.

3. Maintaining records 

It is important to keep records of all client information and financial transactions that are above Rs. 10 lakhs for 5 years. This helps keep track of finances and assists in any investigations that may be required.

4. Monitoring and reporting

It is important to watch for any unusual or suspicious financial activities and report them to the Financial Intelligence Unit – India (FIU-IND). This helps prevent financial crimes and keeps our economy safe.

5. Reliance on third parties

Intermediaries must ensure PMLA compliance before relying on third parties for client due diligence.

6. Payments through banking channels

You can’t use a third-party account to make payments. This is because banks can track where the money is coming from and going to, which helps prevent illegal activities. So, it is important to use your account for all your transactions.

Besides these, regulators also conduct surprise inspections by intermediaries to check PMLA compliance. Flouting norms can attract huge penalties or even loss of license.

With such stringent AML regulations, detecting money laundering in Indian securities markets is no longer easy.

Recent examples of clampdown on money laundering  

PMLA regulations have helped Indian agencies take action in several cases of securities market fraud aimed at money laundering and tax evasion.

In 2015, SEBI barred 129 entities from markets due to a preferential allotment scam by 2 companies to launder funds. Promoters used manipulative trades to show long-term capital gains of Rs 80 crore.

In another case, a real estate firm floated secured debentures to funnel illegal cash into markets. The debenture trustee who facilitated this fraud got 7 years imprisonment.  

The stringent reporting norms also help agencies take timely action. In 2019, a derivatives scam helping clients evade taxes was busted in Mumbai after leads from intermediary reports.

The way forward: improving vigilance 

While the Indian PMLA regime has helped strengthen market supervision, more work is needed to plug gaps.  

Technology solutions like machine learning can help improve monitoring and reporting as we advance. Cross-border information-sharing forums are also vital to tracking global money trails.  

Investor awareness campaigns explaining illegal money pooling risks will also help safeguard their interests.


Money laundering threatens economic stability if left unchecked. Robust PMLA regulations have equipped Indian agencies well to preserve securities market integrity. With rapid enhancements in supervision mechanisms, unscrupulous elements will soon run out of options to funnel illicit money. Being cautious and alert is your first line of defense against fraud as an investor. Seek information on brokers and thoroughly understand risk profiles before transacting to avoid becoming a money laundering conduit.


What is money laundering, and how does it relate to the securities market?

Money laundering refers to concealing illicit funds and channelling them into legal, financial systems to hide their criminal origin. Criminals exploit the securities markets to place, layer, and integrate dirty money due to factors like market liquidity, global reach, and potential for anonymity.

How do money launderers misuse the securities markets?

Common techniques include:
Making complex cross-border financial transactions.
Setting up shell companies to hide beneficial ownership.
Market manipulation through practices like pump and dump schemes.
Exploiting regulatory arbitrage across jurisdictions.

What are some prominent instances of securities market abuse by money launderers in India?

Notable examples are the 2015 case, where over 100 entities used sham preferential allotments and manipulative trading to launder Rs 2,300 crores, and the 2019 case, where a Mumbai broker enabled clients to convert black money through fictitious derivatives trading.

What regulations exist in India to combat money laundering via the stock markets?

Key regulations include the stringent Prevention of Money Laundering Act (PMLA) 2002, SEBI guidelines mandating KYC norms, transaction monitoring, and dematerialised holdings, and establishing the Financial Intelligence Unit to oversee suspicious transaction reporting.

As a retail investor, what precautions can I take regarding money laundering in securities markets?

Before investing, you should undertake thorough due diligence on brokers, advisors, and other market entities. Avoid unsolicited tips, account sharing, and opaque financial schemes promising abnormal profits, which could be red flags for money laundering. Report suspicious instances proactively to authorities.

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