KYC and AML Compliance in Forex
The FEMA declaration and the anti-money laundering checks an AD branch runs on every forex deal.
Foreign exchange is one of the main channels for moving illicit money across borders, so an AD branch carries two sets of duties at once. Under FEMA it must satisfy itself that each transaction is permitted. Under the Prevention of Money Laundering Act and RBI's KYC directions it must know who the customer is, watch for suspicious patterns and report them.
The two overlap but are not the same. A transaction can be a permitted current account remittance under FEMA and still be suspicious under AML rules. CCFE tests whether you can keep both in view.
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Section 10(5): The Declaration Before Every Transaction
Before undertaking any foreign exchange transaction for a person, an AD must obtain a declaration and such other information as will reasonably satisfy it that the transaction is not designed to contravene or evade FEMA or anything issued under it. The AD preserves these documents for RBI's verification. The onus of correct details stays with the applicant who signed them.
If the customer refuses or does not comply satisfactorily, the AD must refuse the transaction in writing, and if it has reason to believe a contravention or evasion is contemplated, report the matter to RBI. Section 10(6) then binds the customer: foreign exchange bought against a declared purpose can be used only for that purpose or another permissible one.
The Duties, Side by Side
Declaration and Form A2
Source
FEMA and RBI's Other Remittance Facilities direction
What it means at the counter
Form A2 for all cross-border remittances, physical or digital, under the bank's board-approved guidelines; Form A2 kept for one year for internal audit
Customer due diligence
Source
RBI KYC directions under PMLA
What it means at the counter
Identify and verify the customer and beneficial owner before the relationship or transaction
Risk categorisation
Source
RBI KYC directions
What it means at the counter
Forex transactions and wire transfers are among the factors used to rate a customer's risk
Periodic KYC updation
Source
RBI KYC directions
What it means at the counter
At least every 2 years for high-risk, 8 years for medium-risk and 10 years for low-risk customers
Wire transfer information
Source
RBI KYC directions
What it means at the counter
Cross-border wire transfers carry required originator and beneficiary information; the bank does not execute a transfer it cannot make compliant
Legal Entity Identifier
Source
RBI circular on LEI
What it means at the counter
Entities must give a valid LEI for cross-border transactions of ₹50 crore and above; once held, it is reported on all their cross-border transactions
Record keeping
Source
PMLA and RBI KYC directions
What it means at the counter
Transaction records kept at least five years from the transaction; identity records at least five years after the relationship ends
| Duty | Source | What it means at the counter |
|---|---|---|
| Declaration and Form A2 | FEMA and RBI's Other Remittance Facilities direction | Form A2 for all cross-border remittances, physical or digital, under the bank's board-approved guidelines; Form A2 kept for one year for internal audit |
| Customer due diligence | RBI KYC directions under PMLA | Identify and verify the customer and beneficial owner before the relationship or transaction |
| Risk categorisation | RBI KYC directions | Forex transactions and wire transfers are among the factors used to rate a customer's risk |
| Periodic KYC updation | RBI KYC directions | At least every 2 years for high-risk, 8 years for medium-risk and 10 years for low-risk customers |
| Wire transfer information | RBI KYC directions | Cross-border wire transfers carry required originator and beneficiary information; the bank does not execute a transfer it cannot make compliant |
| Legal Entity Identifier | RBI circular on LEI | Entities must give a valid LEI for cross-border transactions of ₹50 crore and above; once held, it is reported on all their cross-border transactions |
| Record keeping | PMLA and RBI KYC directions | Transaction records kept at least five years from the transaction; identity records at least five years after the relationship ends |
High-Risk Jurisdictions and Suspicious Transactions
- check_circleFor customers and transactions linked to countries the FATF (Financial Action Task Force) identifies as not or insufficiently applying its standards, banks apply enhanced due diligence and examine the background and purpose of the transaction, keeping written findings.
- check_circleThis does not bar legitimate trade with those countries. It means more questions and a paper trail.
- check_circleBanks screen names on cross-border wire transfers so that they do not process transactions of persons and entities designated under sanctions lists.
- check_circleWhere a bank suspects money laundering or terrorist financing and believes completing due diligence would tip off the customer, it stops the process and files a Suspicious Transaction Report (STR) with FIU-IND instead.
- check_circleStructuring transfers into small amounts to avoid monitoring is itself a red flag that triggers identification and possibly an STR.
Declarations, record keeping and FATF rules. No signup.
Terms You Will Meet
- PMLA
- The Prevention of Money Laundering Act, 2002, the law under which RBI's KYC directions and the reporting obligations sit.
- FIU-IND
- Financial Intelligence Unit, India: the central agency that receives reports such as Cash Transaction Reports and Suspicious Transaction Reports from banks.
- Principal Officer and Designated Director
- The officer responsible for reporting to FIU-IND and the director responsible for overall PMLA compliance. Both are named to FIU-IND.
- Enhanced due diligence
- Additional checks for higher-risk customers or jurisdictions: source of funds, purpose, closer monitoring.
How CCFE Tests This
Typical questions: what an AD must do when a customer refuses the Section 10(5) declaration (refuse in writing and, if contravention is suspected, report to RBI), how long Form A2 is kept versus KYC records (one year versus five), and what applies to FATF-listed jurisdictions. The trap is mixing the retention periods, or answering that FATF listing bans all transactions.
FAQs
What is Section 10(5) of FEMA?expand_more
It requires an authorised person to obtain a declaration and information from the customer that reasonably satisfies it that the transaction does not contravene or evade FEMA. If the customer refuses, the AD refuses the transaction in writing and reports suspected contravention to RBI.
Is Form A2 required for all outward remittances?expand_more
Yes. RBI requires ADs to obtain Form A2, physically or digitally, for all cross-border remittances irrespective of amount, under internal guidelines approved by the board.
How long must banks keep KYC and transaction records?expand_more
At least five years from the date of the transaction for transaction records, and at least five years after the relationship ends for identity records.
When is an LEI needed for a foreign exchange transaction?expand_more
Entities need a valid LEI for cross-border transactions of ₹50 crore and above. Once an entity has an LEI, the bank reports it on all its cross-border transactions.
Next steps
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