Chapter-5: IFSCA (Anti Money Laundering, Counter Terrorist Financing and Know Your Customer) Guidelines, 2022

Part 3: Identification & Reporting of Suspicious Transactions, Correspondent Banking, & Wire Transfers

1. Section 5.5: Identification and Reporting of Suspicious Transactions

The identification, investigation, and reporting of suspicious transactions form the core operational shield of a Regulated Entity (RE). Under the Prevention of Money Laundering Rules (PML Rules), REs are legally mandated to implement active mechanisms to recognize and report suspicious activity. Suspicious activities must be flagged regardless of whether the transactions are completed, in progress, or merely attempted.

1.1 Internal Reporting Requirements and Compliance Architecture

A Regulated Entity's internal compliance structure must ensure that employees on the frontline can escalate suspicions without administrative bottlenecks:

1. Policy Establishment: Every RE must establish, implement, and maintain clear internal policies, procedures, systems, and controls designed specifically to monitor, detect, and evaluate potentially suspicious transactions related to Money Laundering (ML) and Terrorist Financing (TF).

2. The Employee Escallation Rule: Policies and controls must guarantee that when any employee, acting in the ordinary course of their employment, experiences any of the following states of mind regarding a transaction:

   • Knows that a person is engaged in or attempting ML/TF;
   • Suspects that a person is engaged in or attempting ML/TF; or
   • Has reasonable grounds for knowing or suspecting that a person is engaged in or attempting ML/TF;

   The employee must promptly notify the Principal Officer (PO) of the Regulated Entity with all relevant transaction and customer details.

3. Tipping-Off Prohibition: To prevent tipping off, the internal reporting chain must be kept completely confidential. The customer must never be alerted that their transaction is being evaluated for potential suspicious activity.

1.2 The Four-Step Identification Process for Suspicious Transactions

An RE must train its staff to follow a logical, structured path to determine whether an active or attempted transaction warrants the filing of a Suspicious Transaction Report (STR). This process is broken down into four distinct, chronological steps:

1. Detect a Suspicious Indicator(s): The process begins when a transaction fails to conform to standard operational expectations (e.g., unusual cash-like volume, complex routing, or inconsistent transactional behavior).
2. Ask the Customer Questions: The RE's staff must seek clarifications from the customer regarding the transaction's background, purpose, and economic logic, doing so in a non-disruptive, professional manner.
3. Review the Customer’s Records: The compliance team must review the customer's historical account transactions, established business profile, and KYC documents to determine if the activity is anomalous.
4. Evaluate the Information: The Principal Officer must synthesize and objectively evaluate the collected information to decide whether there is a reasonable ground for suspicion.

1.3 Definitive Attributes of a "Suspicious Transaction"

Under the PMLA framework, a Suspicious Transaction is defined as any transaction (including an attempted transaction), whether or not made in cash, which, to a person acting in good faith:

• Proceeds of Crime: Gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime (directly or indirectly derived from a scheduled offence).
• Unjustified Complexity: Appears to be conducted in circumstances of unusual or unjustified complexity.
• No Economic Rationale: Appears to have absolutely no apparent economic rationale or bona fide, legitimate purpose.
• Terrorist Financing: Gives rise to a reasonable ground of suspicion that it may involve the financing of activities relating to terrorism.

1.4 Reporting Obligations to FIU-IND

Once a transaction is deemed suspicious, the RE must formally report it to the Financial Intelligence Unit-India (FIU-IND) under strict regulatory timelines:

• Governing Rules: Information must be furnished in accordance with Rule 3 and Rule 7 of the PML Rules, 2005.
• Filing Timelines:
  • Suspicious Transaction Reports (STRs): Must be submitted promptly to FIU-IND, and not later than seven working days on the Principal Officer being satisfied that the transaction is suspicious.
  • Non-Profit Organisation Transaction Reports (NTRs): Must be submitted monthly, by the 15th day of the succeeding month.
• The Single-Day Delay Penalty Rule: Under Rule 8(4) of the PML Rules, each day's delay in reporting a transaction, or each day's delay in rectifying a misreported transaction beyond the specified time limit, constitutes a separate, independent regulatory violation subject to monetary penalties.
• Mandatory FIU-IND Reporting Address: All reports must be submitted online via the FINGate 2.0 Portal (or in writing/electronic forms, if applicable) to:

  Director, FIU-IND,
  Financial Intelligence Unit-India,
  6th Floor, Tower-2, Jeevan Bharati Building,
  Connaught Place, New Delhi-110001, India.
  Telephone: 91-11-23314429, 23314459 | Website: http://fiuindia.gov.in

Table: Comparison of Suspicious and Non-Profit Reporting Timelines

1.5 Suspicious Reporting Mandates for Specific Professionals

The reporting mandate extends beyond traditional banking institutions. Lawyers, notaries, accountants, and professional service providers are strictly required to file suspicious transaction reports when they engage in a financial transaction on behalf of or for a client in relation to any of the following activities:

1. Buying and selling of real estate.
2. Managing client money, securities, or other assets.
3. Management of bank, savings, or securities accounts.
4. Organization of contributions for the creation, operation, or management of companies.
5. Creation, operation, or management of legal persons or arrangements, and the buying and selling of business entities.

2. Section 5.6: Correspondent Banking and Wire Transfer

2.1 Correspondent Banking Arrangements & Suitability Checks

Correspondent Banking is a structural arrangement where one financial institution (the correspondent bank) provides specialized services to another financial institution (the respondent bank) to facilitate transactions (such as wire transfers, foreign exchange, or trade finance) in a jurisdiction where the respondent bank does not have a physical presence.

Because these cross-border relationships involve significant transactional volume, the IFSCA Guidelines impose strict requirements before establishing such arrangements:

The Governing Body Approval Rule

An RE must have a formal policy approved by its Governing Body (or by a high-level committee headed by the Chairman, CEO, or Managing Director) that lays down clear, objective parameters for approving correspondent relationships.

The 3-Step Suitability Assessment Framework

Prior to onboarding a respondent bank, the RE must execute and document a comprehensive suitability check:

1. Information Gathering: Collect detailed information about the respondent bank to fully comprehend its business lines, management structure, and geographic footprint.
2. Reputation and Supervision Check: Determine the respondent bank's market reputation and the quality of regulatory supervision under which it operates. This includes verifying whether it has been subjected to any ML/TF investigations or regulatory sanctions.
3. AML/CFT Controls Assessment: Formally evaluate the adequacy and effectiveness of the respondent bank’s internal AML/CFT controls, taking into account the strength of the anti-money laundering laws of its home jurisdiction.

2.2 Ongoing Operational Safeguards for Correspondent Banking

Once a correspondent banking relationship is approved, the RE must enforce several ongoing operational controls:

• Documentation of Roles: The specific, mutual AML/CFT compliance responsibilities of each bank must be clearly documented.
• Senior Management Sign-Off: Prior approval from Senior Management is required before going live with correspondent services.
• Payable-Through-Accounts (PTAs): If the relationship involves PTAs (where the respondent's customers have direct transactional access to the correspondent's accounts), the RE must verify that:
  1. The respondent bank has fully verified the identity of every customer with access.
  2. The respondent bank conducts ongoing due diligence on these accounts.
  3. The respondent bank is capable of providing relevant customer identification data immediately upon request.
• The Shell Financial Institution Ban:
  1. No RE shall enter into a correspondent banking relationship with a Shell Financial Institution (a bank with no physical presence in any country and unaffiliated with a regulated financial group).
  2. The RE must ensure that respondent banks do not allow their accounts to be used by any Shell Financial Institution.
• FATF Deficiency Vigilance: REs must exercise extreme caution when dealing with respondent banks located in jurisdictions identified by the FATF as having strategic AML/CFT deficiencies.

2.3 Wire Transfers: Core Regulatory Principles

A Wire Transfer refers to any transaction conducted on behalf of an originator through a financial institution by electronic means with the view to making funds available to a beneficiary at a beneficiary institution.

To prevent wire networks from being exploited by illicit actors, the IFSCA enforces the following baseline rules:

• Banking Unit Mandate: All financial institutions operating in the IFSC must transact and receive all monetary consideration (funds, fees, or transaction amounts) only through an account maintained with a licensed Banking Unit in the IFSC.
• Omission Ban: No RE shall omit, delete, or alter any information in payment messages to avoid detection by other intermediary or receiving institutions in the payment chain.
• Immediate Sanctions Action: If a name-screening check confirms that a wire transfer originator or beneficiary is a listed terrorist or terrorist entity under UNSC lists or domestic laws, the RE must block, reject, or freeze the assets immediately and escalate the positive hit to the Principal Officer.

2.4 Cross-Border Wire Transfer Rules & Information Thresholds

When executing or receiving cross-border wire transfers, the ordering institution must embed specific, verifiable identifier records within the payment instruction message:

1. Low-Value Threshold (Amounts Below or Equal to USD 1,000)

For transfers where the aggregate amount is below or equal to USD 1,000, the message must include:

• The name of the wire transfer originator.
• The originator's account number (or a unique transaction reference number if no account number exists).
• The name of the wire transfer beneficiary.
• The beneficiary's account number (or unique transaction reference number).

2. High-Value Threshold (Amounts Exceeding USD 1,000)

For transfers exceeding USD 1,000, the ordering institution must embed all the low-value details plus any one of the following additional details:

• The originator’s residential address, or registered/business address (including principal place of business, if different).
• The originator’s unique national identification number (e.g., identity card number, passport number, or corporate incorporation/business registration number).
• The originator's date and place of birth, incorporation, or registration.

3. Bundled Batch Files Rule

If an ordering bank bundles multiple individual cross-border transfers from a single originator into a single batch file for transmission, the batch file must contain the fully verified originator information and complete beneficiary details, ensuring they are fully traceable within the beneficiary country.

2.5 Domestic Wire Transfer Rules

A Domestic Wire Transfer is defined as any wire transfer where both the ordering institution and the beneficiary institution are physically located within the IFSC, or any payment chain that takes place entirely within the IFSC.

For domestic transfers, the ordering bank has two compliance options:

Option A: Full Message Disclosure

Include the originator's name, account number, and any of their primary identifiers (address, unique national ID number, or date and place of birth/incorporation) directly in the message.

Option B: Account-Only Disclosure (with Tracing Undertaking)

The ordering bank may choose to include only the originator’s account number (or unique transaction reference number), provided:

1. The details are sufficient to permit the entire transaction to be traced back to both the originator and the beneficiary.
2. The ordering institution formally undertakes to provide the full originator details within 3 business days of receiving a request from the beneficiary institution, the IFSCA, or other competent authorities.
3. The ordering institution agrees to provide the full originator details immediately upon receiving a request from any Indian law enforcement authority.

❌ Non-Execution Mandate: If an ordering institution is unable to collect, verify, or comply with these domestic and cross-border information requirements, it is legally barred from executing the wire transfer.

2.6 Responsibilities of Intermediary Institutions in Wire Transfers

When a bank or RE acts as an intermediary institution (passing a wire transfer between an ordering and a beneficiary institution), it must uphold strict data integrity and record-keeping standards:

• Information Retention: The intermediary must retain all accompanying originator and beneficiary information within the transfer message.
• The Technical Limitation Rule: If technical constraints prevent the required originator or beneficiary details from remaining with a related domestic transfer, the receiving intermediary must preserve a complete transaction record for at least six years.
• Suspension and Rejection Controls: Intermediaries must establish clear risk-based policies, procedures, and controls to determine:
  1. When to execute, reject, or suspend a transfer that is identified as lacking complete originator or beneficiary details.
  2. The appropriate, risk-proportionate follow-up actions to take after suspending or rejecting a transfer.
• Straight-Through Processing (STP) Monitoring: The intermediary must take reasonable measures, consistent with automated straight-through processing, to actively identify cross-border transfers that lack the mandatory identification details.

3. Key Exam-Relevant Terms & Definitions

• Suspicious Transaction Report (STR): A mandatory report filed with FIU-IND within 7 working days of concluding that a transaction (completed or attempted) involves suspicious indicators.
• Non-Profit Organisation Transaction Report (NTR): A monthly report submitted to FIU-IND for transactions involving NPO receipts exceeding INR 10 Lakh.
• Tipping-Off: The illegal act of disclosing to a customer or unauthorized third party that a suspicious transaction alert has been raised or reported.
• Correspondent Bank: A bank that acts as an intermediary for a respondent bank to execute cross-border transactions in a market where the respondent has no physical operations.
• Shell Financial Institution: A bank incorporated in a jurisdiction where it has no physical presence or management, and which is unaffiliated with a regulated financial group.
• Wire Transfer Originator: The individual or entity that initiates a wire transfer to make funds available to a beneficiary.

4. Important Takeaways for Students & Professionals

1. Seven-Day Hard Deadline: The 7-working-day timeline for filing an STR begins the moment the Principal Officer is satisfied that a transaction is suspicious, and any delay constitutes a separate daily violation.
2. Every Attempt Counts: Attempted transactions carry the same legal weight as completed transactions. If a customer walks away because of a KYC query, an STR must still be considered.
3. Strict Shell Bank Ban: REs are strictly prohibited from entering into correspondent relationships with shell banks or with respondent banks that allow shell banks to utilize their accounts.
4. USD 1,000 Cross-Border Split: Cross-border wire transfers of USD 1,000 or less require basic name and account details, whereas transfers exceeding USD 1,000 require complete, verified identity records (address, national ID, or birth details).
5. Domestic 3-Day Rule: Ordering banks can send domestic wire transfers with just an account number, but they must be prepared to furnish full originator details within 3 business days to the beneficiary bank or IFSCA, or immediately to Indian law enforcement.