New PMLA Rules for Overseas Investments: How to Stay Compliant

Investing abroad was once considered a simple diversification move. But as India’s financial footprint expands globally, regulators have tightened the rules to make sure the money flowing out of the country is clean, traceable, and legitimate.

The Prevention of Money Laundering Act (PMLA) now plays a central role in monitoring overseas investments. It ensures that every rupee sent abroad is accounted for, and that no one uses complex foreign structures to hide income or evade taxes. For Indian businesses, startups, and individuals investing through the Liberalised Remittance Scheme (LRS), these changes mean one thing: compliance now travels with your capital.

The government isn’t discouraging global investments. It’s simply making sure that such investments don’t turn into blind spots for illicit transfers. The new framework demands better transparency, documentation, and a clear link between the investor and the source of funds.

What Triggered the New PMLA Rules for Overseas Investments

The shift began with the PMLA amendments of 2023, which expanded the definition of “reporting entities” and tightened the rules around customer due diligence. Around the same time, the Foreign Exchange Management (Overseas Investment) Rules, 2022, and the Reserve Bank of India's 2024 Master Direction on overseas investments modernized India’s overseas investment framework.

Together, these reforms built a coordinated monitoring system between the Reserve Bank of India (RBI), the Financial Intelligence Unit (FIU-IND), and the Enforcement Directorate (ED).

Here’s what pushed regulators to act:

• Opaque ownership structures: Many Indian investors were routing funds through offshore subsidiaries without clearly revealing who controlled them.
• Round-tripping of funds: Money leaving India through one entity and returning through another as “foreign investment.”
• Global FATF standards: India is aligning its anti-money-laundering system with the Financial Action Task Force recommendations that demand beneficial-ownership transparency.

The goal isn’t just to prevent laundering, it’s to make India’s capital flows more credible, both at home and abroad.

What’s Actually Changed for Overseas Investors

The rules are far more detail-oriented now, and every player in the system, investor, banker, accountant, or consultant, has new responsibilities.

A. Expanded KYC requirements: Banks and financial institutions must now collect information about senior management, beneficial owners, and the ultimate source of funds. Even small overseas investments may require full disclosure of ownership and control structure.

B. Enhanced due diligence: Before transferring funds abroad, authorised dealers must verify whether the investment aligns with declared income, business activity, and purpose. Unclear transactions are flagged for the FIU-IND.

C. Cross-reporting between RBI and FIU: Information collected under FEMA’s overseas investment forms can now be shared with PMLA agencies — creating a single data trail for foreign transactions.

D. Lower beneficial ownership threshold: Earlier, only individuals holding 25 percent or more were classified as beneficial owners. The new PMLA Rules reduce this to 10 percent, meaning more entities now fall under disclosure.

E. Wider net of reporting entities: Even professionals such as chartered accountants, company secretaries, and cost accountants who assist in setting up offshore structures are now required to conduct basic due diligence and report suspicious transactions. However, legal professionals are not currently covered under these obligations.

F. Monitoring of tax-haven investments: Transfers routed through jurisdictions known for secrecy or low taxation are subject to enhanced scrutiny. While there's no specific rule mandating “economic substance” checks, banks are expected to ensure that the investments are transparent and not used for disguising the source or destination of funds.

Who Needs to Comply: New PMLA Rules for Overseas Investments

The updated framework casts a wider net than before. Compliance isn’t just for large corporations anymore; it applies across investor categories:

• Individual investors using the Liberalised Remittance Scheme (LRS) to buy foreign stocks, real estate, or units of foreign funds.
• Indian companies are setting up subsidiaries, joint ventures, or acquiring stakes abroad (ODI/OPI).
• Financial intermediaries — banks, NBFCs, and brokers facilitate these transactions.
• Professional service providers — accountants, lawyers, consultants who structure or advise on overseas investment deals.

Every party involved must ensure that the source of funds, ownership chain, and purpose of investment are transparent and verifiable. Under the new PMLA rules, it’s no longer enough to have the right paperwork. Regulators now expect a clean, traceable story behind every transfer.

Red Flags That Now Attract PMLA Attention

Under the new regime, authorities are focusing on patterns, not just paperwork. Even a legally permitted overseas investment can come under the scanner if it shows irregularities such as:
Round-tripping: Funds leave India through one company and re-enter as “foreign investment” via another route

• Hidden ownership: Nominee or proxy shareholders are used to mask the real controller
• Complex layering: Multiple shell companies or trusts in tax-neutral jurisdictions to blur the money trail
• Disproportionate investment: The overseas amount far exceeds declared income or business capacity
• Unclear purpose: Vague remittance descriptions like “consulting fees” or “marketing expenses” with no contract backup
• Dormant entities: Investing in offshore companies with no operations or substance

Each of these can trigger red flags in bank screening or FIU-IND analysis, inviting follow-up notices or inspections under PMLA.

How to Stay Compliant – A Simple Checklist for New PMLA Rules

1. Identify and Declare Beneficial Owners (BOs)

Disclose anyone owning or controlling 10 percent or more of shares or voting rights. Keep proof of identity and ownership on record.

2. Document the Source of Funds

Maintain evidence showing how the money was earned; audited statements, tax filings, or dividend receipts.

3. Use Authorised Channels Only

Route all remittances through RBI-authorised dealers. Avoid informal forex agents or third-party accounts.

4. Complete FEMA Reporting Accurately

File ODI/OPI forms on time with RBI, and match them with your bank’s remittance records.

5. Maintain Transaction Records

Keep digital copies of all transfers, invoices, and communications for at least five years — mandatory under PMLA.

6. Do Independent Due Diligence

Check your overseas partner’s background, business activity, and regulatory status before investing.

7. Audit Regularly

Conduct internal AML audits to ensure documents, filings, and ownership records remain updated.

8. Report Suspicious Activity

If you spot inconsistencies or suspect misuse, file a Suspicious Transaction Report (STR) through your bank or intermediary.

Penalties for Non-Compliance: New PMLA Rules

Ignoring the new PMLA rules can prove costly, not only financially but reputationally.

Here’s what violations can lead to:

• Property attachment: The Enforcement Directorate (ED) can provisionally attach assets, including overseas holdings, suspected of being linked to money laundering.
• Heavy fines: Penalties up to ₹5 lakh per violation under FEMA, and further punishment under PMLA, which may include imprisonment.
• Freezing of foreign accounts: Banks abroad cooperating with Indian authorities can suspend transactions linked to suspicious transfers.
• Personal liability: Directors, compliance heads, or authorised signatories can be held individually accountable for negligence or misreporting.