FinTechAML and PMLA Obligations for Fintechs

INTRODUCTION

India’s fintech revolution has profoundly changed how the populace handles everyday finances—whether it’s making payments, saving, or investing. The widespread adoption of UPI, digital wallets, and AI-driven lending platforms has brought financial services within easy reach of the average citizen. However, as digital finance becomes more deeply woven into the lives of the broader populace, it also introduces significant regulatory challenges. Rising concerns around financial fraud, cybercrime, and the need for transparency in digital transactions are pushing regulators to adapt quickly in order to protect users and maintain trust in the system.

Amidst this evolving landscape, the government of India has grown more vigilant in regulating the operations of Fintech  organisations. In 2023 and 2024, the Government of India introduced a series of regulatory updates extending the scope of the Prevention of Money Laundering Act, 2002 (“PMLA”) to include cryptocurrency-related businesses and payment aggregators/gateways. This regulatory shift brings thousands of additional fintech entities under the ambit of Anti-Money Laundering (“AML”) laws, placing stringent compliance obligations on them to avert legal and financial liabilities.

THE PREVENTION OF MONEY LAUNDERING ACT

The PMLA is India’s primary legislation aimed at curbing the conversion of illicit proceeds into clean money. It empowers the government to monitor suspicious financial activities, investigate financial crimes, and impose penalties on individuals or institutions facilitating money laundering. Historically, compliance with the PMLA was limited to traditional entities such as banks, financial institutions, insurance companies, and select Non-Banking Financial Companies (NBFCs). However, as fintech rapidly expanded its footprint in India’s financial ecosystem, significant regulatory gaps emerged—particularly in areas like digital payments and cryptocurrency transactions—highlighting the need for broader oversight.

To address this, the Government began gradually expanding the scope of entities classified as “Reporting Entities” under the PMLA. Once designated as such, these companies must implement stringent AML measures, including robust Know Your Customer (KYC) procedures, transaction monitoring, and mandatory reporting to the Financial Intelligence Unit (“FIU-IND”).

THE NOTIFICATION OF MARCH 2023

A landmark moment arrived in March 2023, when the Ministry of Finance issued a notification explicitly bringing Virtual Digital Asset (VDA) service providers, i.e., crypto exchanges, wallet providers, and platforms involved in the transfer or safekeeping of crypto assets, under the PMLA framework. This meant that Indian crypto companies were now officially “reporting entities” with legal obligations akin to traditional financial institutions.

This move aligned India with global regulatory trends, particularly those recommended by the Financial Action Task Force (“FATF”), which advocates for comprehensive AML frameworks for digital assets. The notification closed a critical regulatory gap, where crypto platforms were facilitating high-value, anonymous transactions with little oversight.

Now, crypto players in India are expected to conduct full KYC on users, monitor transactions for unusual patterns (such as rapid high-value transfers or cross-border movements), and file Suspicious Transaction Reports (“STR”) with the FIU.

ROLE OF PAYMENT AGGREGATORS IN PML ARENA

While crypto took centre stage in 2023, payment gateways and aggregators entered the compliance spotlight in early 2024. These platforms, such as Razorpay, PayU, and Cashfree, serve as intermediaries between merchants and customers, facilitating digital payments at scale. Given their involvement in handling significant transaction volumes and merchant onboarding, regulators identified them as potential channels for money laundering, tax evasion, and fraud.

Consequently, RBI and the Ministry of Finance included payment aggregators under the PMLA. This move significantly broadened the base of fintech entities required to implement AML protocols. Even if a fintech doesn’t hold customer funds directly (e.g., merely routing transactions), it may still be covered under the reporting obligations due to its role in facilitating financial flows.

What Does It Mean to Be a “Reporting Entity”?

Being classified as a “reporting entity” under the PMLA means a fintech must actively participate in the fight against financial crime by implementing processes, technology, and documentation protocols that help the government trace and prevent illicit activities.

The key obligations include:

1. KYC Compliance

Fintechs must identify and verify their customers using Officially Valid Documents (“OVDs”) such as Aadhaar, PAN, passport, or voter ID. For high-risk clients, such as politically exposed persons (“PEPs”) or non-resident users, enhanced due diligence is required. This includes verifying the source of funds, ongoing monitoring, and in some cases, face-to-face video verification.

2. Maintenance of Transaction and Identity Records

Entities are obligated to retain comprehensive records, including:

• Customer identification data
• Nature and value of transactions
• IP addresses, geolocation, and device fingerprints. These records must be preserved for a minimum of five years from the date of the transaction or termination of the business relationship.

3. Suspicious Transaction Reporting (STR)

If a fintech detects unusual or potentially illegal behaviour, such as an account showing sudden large deposits without business justification or repetitive cross-border transfers just below reporting thresholds, it must file an STR with the FIU-IND. These reports are confidential and serve as the first trigger for potential investigations by enforcement agencies.

4. Appointment of Principal Officer and Designated Director

Each reporting entity must appoint a Principal Officer responsible for ensuring compliance with the PMLA. For incorporated entities, a Designated Director (often someone at the board level) must also be assigned to oversee the entire AML framework.

THE CRYPTO CHALLENGE

Compliance in the crypto space presents unique hurdles. Unlike traditional finance, blockchain transactions are pseudonymous, global, and irreversible. Even when platforms implement robust KYC at the entry point, once funds leave the ecosystem to external wallets, tracing the money trail becomes complex.

Moreover, Indian exchanges often deal with global customers and custodians, which brings in cross-border AML obligations. The government is likely to push for compliance with the “travel rule”, a FATF guideline that requires crypto service providers to exchange originator and beneficiary information for every transaction.

To navigate this, Indian exchanges have ramped up internal compliance units, adopted blockchain analytics tools, and begun filing regular STRs with FIU-IND.

PRACTICAL COMPLIANCE TIPS FOR FINTECHS

For fintechs newly brought under PMLA, compliance doesn’t need to be a bureaucratic nightmare. With the right processes and technology, AML can be integrated seamlessly into product and operational workflows.

Here are some best practices:

• Automated KYC and onboarding: Use Aadhaar e-KYC, video verification, and selfie ID checks.
• Transaction monitoring tools: Deploy AI/ML-based systems to detect unusual patterns or anomalies in user behaviour.
• STR filing workflows: Integrate STR flagging and submission into internal dashboards; FIU-IND now accepts online reports.
• Staff training: Ensure all customer support and risk teams understand red flags and escalation procedures.
• Policy documentation: Draft a formal AML policy and share it with stakeholders, regulators, and auditors when needed.

CONSEQUENCES OF NON-COMPLIANCE

The cost of ignoring these obligations is steep. If a fintech fails to meet its PMLA responsibilities, it may face:

• Hefty monetary penalties
• Suspension of licenses or operations
• Freezing of accounts
• Prosecution under the PMLA, which may involve arrests in extreme cases of willful misconduct
• Loss of customer trust and investor confidence

WHY AML IS A STRATEGIC INVESTMENT AND NOT JUST A REGULATORY BURDEN

For early-stage fintechs and ambitious scale-ups, compliance with PMLA may initially feel like a mandatory checkbox, an expensive and time-consuming distraction from growth. But this view overlooks a deeper reality. AML is not merely about avoiding penalties. When approached strategically, it becomes a powerful enabler of credibility, scalability, and long-term business value.

Here is how a strong AML framework creates meaningful business advantages:

Strengthens Banking Partnerships

Fintechs rely heavily on banks for payment infrastructure, custody, and settlement. However, banks operate under increasing regulatory pressure and are selective about whom they partner with. Demonstrating a solid AML framework builds institutional trust, simplifies onboarding, and ensures continued access to critical banking services.

Accelerates Global Expansion

AML compliance standards are increasingly harmonized under FATF guidelines, and many jurisdictions such as the US, UK, and Singapore impose stringent requirements. Fintechs with globally-aligned AML controls find it easier to enter new markets, obtain licenses, and engage with cross-border partners without friction or delay.

Inspires Investor Confidence

Investors today expect more than just growth metrics. AML readiness is now part of due diligence, with VCs and institutional funds frequently seeking clarity on compliance processes and audit trails. Fintechs that can demonstrate robust AML systems are better positioned to raise capital, secure higher valuations, and attract long-term investors.

Enhances Customer Trust and Brand Integrity

Customers are increasingly aware of fraud risks and data privacy. Fintechs that communicate their AML commitment signal responsibility and transparency. Secure onboarding, effective transaction monitoring, and visible compliance measures contribute directly to brand credibility and user retention.

Future-Proofs the Business

Regulatory expectations evolve rapidly. Investing early in scalable AML systems such as automated monitoring, intelligent risk scoring, and audit readiness reduces the cost and disruption of later-stage compliance. This forward-thinking approach minimizes exposure to regulatory surprises and reputational damage.

Essentially, AML is not a cost centre but a value driver. For fintechs navigating a competitive and regulated environment, AML maturity under PMLA is a foundational pillar for growth, trust, and global relevance.

AMLEGALS REMARKS

The extension of the PMLA to include cryptocurrency platforms and payment aggregators represents a watershed moment in India’s fintech regulatory landscape. This shift signifies a decisive move by the Government to tighten oversight over digital financial intermediaries and align domestic practices with global AML standards.

For fintech entities, the message is clear: compliance is no longer optional or limited to traditional financial institutions. Whether handling digital assets or facilitating high-volume payment flows, fintechs must now operate with greater vigilance, implement robust AML frameworks, and actively collaborate with regulators to combat financial crime.

While the compliance burden may appear challenging, especially for startups and fast-growing ventures, it is also a strategic imperative. A strong AML compliant framework not only ensures legal adherence but also enhances credibility with banks, investors, and customers alike. As India’s digital economy matures, those fintechs that treat compliance as a core value and not just a checkbox, will be better positioned to scale sustainably and responsibly in the years ahead.

– Team AMLEGALS assisted by Mr. Ashish Singh (Intern)