Chapter-5: IFSCA (Anti Money Laundering, Counter Terrorist Financing and Know Your Customer) Guidelines, 2022
Part 1: Introduction & Duties of a Regulated Entity (RE)
1. Introduction to the IFSCA AML, CFT, and KYC Guidelines, 2022
1.1 Regulatory Background & Legislative Mandate
The International Financial Services Centres Authority (IFSCA) was established in April 2020 by the Government of India under the International Financial Services Centres Authority Act, 2019.
As a unified regulatory body, the IFSCA is vested with the regulatory powers of four pre-existing domestic financial sector regulators in India:
- Reserve Bank of India (RBI)
- Securities and Exchange Board of India (SEBI)
- Insurance Regulatory and Development Authority of India (IRDAI)
- Pension Fund Regulatory and Development Authority of India (PFRDAI)
The primary role of the IFSCA is to develop and regulate financial products, financial services, and financial institutions within the International Financial Services Centre (IFSC) in India (primarily the GIFT IFSC in Gandhinagar, Gujarat).
To maintain market integrity, investor confidence, and the orderly functioning of India's international financial markets, the IFSCA is committed to ensuring that the IFSC's regulatory environment is fully compliant with the Financial Action Task Force (FATF) Recommendations. Consequently, following the Prevention of Money Laundering Act, 2002 (PMLA) and international standards, the IFSCA issued the IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022 (abbreviated as the IFSCA (AML, CFT and KYC) Guidelines, 2022).
1.2 Core Objectives and Initiatives of the Guidelines
The Guidelines require all entities operating in the IFSC to establish robust and comprehensive AML/CFT frameworks. These frameworks are designed to detect, prevent, and report activities associated with money laundering (ML), terrorist financing (TF), and proliferation financing (PF).
To achieve this, the IFSCA employs a combination of regulatory tools and supervisory mechanisms:
- Customer Due Diligence (CDD): Mandating proper identification, verification, and ongoing monitoring of customers.
- Risk-Based Approach (RBA): Requiring entities to identify, assess, and classify the specific risks to which they are exposed.
- Enhanced Due Diligence (EDD): Applying stricter controls and deeper scrutiny for high-risk customers, such as Politically Exposed Persons (PEPs).
- Record-Keeping: Preserving a clear audit trail of transactions and identity verifications for immediate retrieval by law enforcement or supervisory authorities.
- Reporting of Suspicious Transactions: Obligating the reporting of suspicious activities (both executed and attempted) directly to Financial Intelligence Unit-India (FIU-IND).
- Onsite and Offsite Supervision: Conducting regular supervisory audits and reviews to verify compliance and identify operational weaknesses in the regulated entities' frameworks.
1.3 Architectural Structure of the Guidelines
The IFSCA (AML, CFT and KYC) Guidelines, 2022 are systematically structured across 12 comprehensive chapters, each addressing a critical pillar of the financial safety framework:
Table: Chapter-wise Breakdown of the IFSCA Guidelines, 2022
| Chapter Number | Chapter Name / Subject Matter | Core Regulatory Focus |
|---|---|---|
| Chapter-I | Applicability, Definitions and Responsibilities | Defines the jurisdictional boundaries, key terms, and baseline duties of entities operating in the IFSC. |
| Chapter-II | Risk-Based Approach | Outlines how to implement an objective, proportionate, and updated risk framework. |
| Chapter-III | Business Risk Assessment | Details enterprise-wide risk evaluation based on products, clients, and technologies. |
| Chapter-IV | Customer Risk Assessment | Governs parameter selection for assigning low, medium, or high risk ratings to clients. |
| Chapter-V | Customer Due Diligence | Lays down the step-by-step procedures for identifying and verifying customers. |
| Chapter-VI | Third Party Reliance | Regulates conditions under which an entity can rely on third-party CDD. |
| Chapter-VII | Correspondent Banking and Wire Transfer | Standardises cross-border and domestic banking relations and wire safety parameters. |
| Chapter-VIII | Internal Policies, Compliance, Audit and Training | Establishes governance structures, internal audit functions, and staff training standards. |
| Chapter-IX | Record Keeping | Prescribes timelines and systems for preserving documents and transaction data. |
| Chapter-X | Process of Identification and Reporting of Suspicious Transactions | Outlines the internal reporting lines and the process of submitting STRs to FIU-IND. |
| Chapter-XI | Compliance Obligations under International Agreements and Domestic Laws | Ensures compliance with UNSC sanctions, the UAPA, and local anti-terror laws. |
| Chapter-XII | Groups, Branches and Subsidiaries | Governs the application of group-wide policies across foreign branches and subsidiaries. |
2. Duties of a Regulated Entity (RE)
2.1 Defining a "Regulated Entity" in the IFSC
Under the Guidelines, a Regulated Entity (RE) is defined as any unit, firm, or entity that has been granted:
- License
- Recognition
- Registration
- Authorisation
by the International Financial Services Centres Authority (IFSCA).
⚠️ Permitted Legal Forms in IFSC: It is highly critical to note that within the GIFT IFSC, the permitted legal forms for establishing a Regulated Entity are strictly limited to companies, partnership firms, and body corporates. Proprietary concerns are not permitted to operate as financial services intermediaries under the IFSCA domain.
2.2 The Three Fundamental Duties of a Regulated Entity
Every Regulated Entity must comply with three core governance obligations to ensure their organizational structure is resilient against illicit financial flows:
| No. | Duty | Key Requirement |
|---|---|---|
| 1 | 📋 Formulation of AML-CFT Policy | Establish an AML-CFT policy with approval from the governing body. |
| 2 | 🪪 Development of KYC Policy | Develop a KYC policy and integrate it into the overall AML-CFT framework. |
| 3 | 👔 Senior Management Accountability | Senior management must assume accountability and responsibility and exercise the required skill and care in implementing AML-CFT controls. |
1. Formulation of an AML-CFT Policy
- Every RE is mandatorily required to formulate a comprehensive AML-CFT Policy.
- This policy must be duly approved by the Governing Body of the Regulated Entity, or by a specialized committee to whom such powers have been formally delegated by the Governing Body.
- The policy must incorporate all the key principles, rules, and statutory elements laid down in the IFSCA Guidelines.
2. Development of a KYC Policy
- Additionally, every RE must design and implement a structured Know Your Customer (KYC) Policy.
- The KYC Policy must not exist in isolation; it must be an integrated component of the overall AML-CFT Policy of the Regulated Entity.
3. Senior Management Accountability and Responsibility
- Every member of a Regulated Entity's Senior Management is held directly and personally responsible for the RE’s overall compliance under these Guidelines.
- While discharging their statutory compliance duties, every member of the Senior Management must exercise due skill, care, and diligence.
- Senior Management must prevent any conflict of interest between business growth lines and AML compliance obligations, ensuring that compliance concerns are resolved objectively.
3. Key Exam-Relevant Terms & Definitions
- IFSCA: International Financial Services Centres Authority, the unified regulator for GIFT IFSC.
- Regulated Entity (RE): A licensed, recognized, registered, or authorized unit in the IFSC, excluding proprietary concerns.
- Governing Body: The highest decision-making authority within the RE (e.g., Board of Directors) responsible for approving the core AML-CFT and KYC policies.
- Senior Management: The executive management team responsible for the implementation of the board-approved policies, expected to operate with high diligence, skill, and care.
- AML/CFT: Anti-Money Laundering and Combating the Financing of Terrorism. Note that in the IFSC domain, CFT and CTF are used interchangeably.
4. Important Takeaways for Students & Professionals
- Unified Authority Advantage: The establishment of IFSCA consolidated the jurisdiction of RBI, SEBI, IRDAI, and PFRDAI into a single window, creating a highly efficient but robustly compliant ecosystem aligned with international FATF standards.
- Strict Policy Governance: A Regulated Entity cannot operate without a Governing Body-approved AML-CFT policy that contains an integrated KYC policy.
- High Accountability on Management: Senior Management is legally bound to exercise due skill and care. They cannot bypass compliance responsibilities for the sake of business interests, and they are held accountable for any failures in the AML-CFT framework.
- Permitted Legal Forms: Only companies, partnerships, and body corporates can be licensed as REs; proprietary concerns are barred.