Legal Risks in Cross Border Remittances for Startups : A Study of FEMA, PMLA, and Global Compliance Obligations

Introduction : Cross-border remittance transfers of funds across national boundaries sit at the operational core of much of the startup economy. An Indian SaaS company invoicing a client abroad, a marketplace paying gig workers overseas, an e-commerce startup collecting export proceeds, or a venture receiving offshore investment are all, in law, participants in cross-border remittance transactions. India has long remained among the largest recipients of inward personal remittances globally, and outward remittance under the RBI's Liberalised Remittance Scheme has grown steadily, reflecting deepening economic integration.

For a founder, a remittance often looks like a mere banking formality: a wire transfer or a foreign-currency invoice. In law, each transaction is where exchange control and banking regulation and anti-money laundering law and taxation and sanctions law all meet. If a startup does not follow the rules by mistake, the startup and its directors can get in trouble. They can get fines under the Foreign Exchange Management Act, 1999 or "FEMA”. They can also get in trouble with the law under the Prevention of Money Laundering Act, 2002 or "PMLA”. The bank can stop doing business with them. If they deal with US dollars, they have to follow the rules of the US Office of Foreign Assets Control or "OFAC”.

This blog looks at the rules for sending money across borders in India. How they compare to rules in other countries. It takes a look at the problems with these rules and talks about what happens when people do not follow them. It also thinks about what this means for the people who start companies, the people who invest in companies and the people who make laws.

Legal Provisions

Indian Legal Framework

The principal legislation regulating foreign exchange in India is the Foreign Exchange Management Act, 1999. This act succeeded the previous Foreign Exchange Regulation Act, 1973 and established a more adaptable framework with civil law repercussions. Section 3 of the Act specifies that foreign exchange can only be managed by authorized entities. Section 5 permits transactions associated with current accounts, including trade payments, though there are certain limitations.

Section 6 and the Non-debt Instruments Rules, 2019 govern capital account transactions such as equity investments. Sections 10 and 11 empower the Reserve Bank of India (RBI) to oversee the banks involved in remittances, commonly referred to as authorized dealer banks. Individuals who reside in the country are also governed by the Liberalised Remittance Scheme that was launched in February 2004. Through this program, individuals can transfer a maximum of USD 250,000 annually for specific reasons, but they must submit Form A2, present their PAN, and demonstrate the origin of their funds.

If an individual moves an amount greater than the designated limit, they are required to obtain explicit approval from the Reserve Bank of India (RBI), and unauthorized transfers of that amount constitute a breach of the Foreign Exchange Management Act (FEMA). Startups involved in payment facilitation must adhere to the RBI's "Regulation of Payment Aggregator – Cross Border" guidelines established in October 2023. Another important legislation is the Prevention of Money Laundering Act, 2002. Section 3 of this legislation characterizes money laundering as any procedure that includes the earnings from illegal activities. Section 4 describes the consequences for these actions.

Section 12 mandates that reporting entities like banks, payment system operators, and currently payment aggregators maintain records and report any unusual transactions to the Financial Intelligence Unit-India. Sections 5 and 8 permit authorities to temporarily take and ultimately confiscate assets associated with money laundering, even amid a current investigation. Non-profit startups obtaining foreign donations are regulated by the Foreign Contribution (Regulation) Act, 2010.

International and Comparative Framework

The Financial Action Task Force's Forty Recommendations form the reference standard for national AML/CFT regimes; Recommendation 16 addresses wire transfers and requires originator and beneficiary information to travel with cross-border payment messages the “Travel Rule.”

In the United States, companies that send money are treated as "money services businesses" under the Bank Secrecy Act. This means they must register with FinCEN and have an anti-money laundering program. Additionally, OFAC manages sanctions that can apply internationally to any transaction that uses the U.S.dollar system. In the European Union, payment institutions are regulated through the Payment Services Directive, and they must provide details about the sender and receiver under the Wire Transfer Regulation. Similarly, the UK's Money Laundering Regulations 2017 and Payment Services Regulations 2017 require similar compliance measures.

Legal Analysis

The framework governing cross-border remittances rests on an unresolved tension between two objectives: facilitating capital flow for a globally integrated startup economy, and preventing misuse of remittance channels for laundering, terrorist financing, and sanctions evasion. This tension manifests in at least three respects.

First, the PA-CB net-worth thresholds have drawn divergent views. Regulators frame them as a proportionate, risk-based safeguard ensuring escrow-holding entities have the balance-sheet strength to absorb losses and discouraging arbitrage by undercapitalised intermediaries. Fintech founders take the contrary view that a flat threshold, irrespective of transaction volume, disproportionately burdens smaller startups relative to incumbents, potentially consolidating rather than democratising the market. Both positions have merit; the likely resolution lies in calibrating obligations to transaction volume rather than a uniform floor.

Second, the characterisation of an inward remittance current account receipt, capital account transaction, or one requiring specific approval is not always self-evident when funds are received, particularly for startups using newer structures such as revenue-based financing or convertible instruments. Because FEMA classifies transactions ex ante, ambiguous structuring exposes founders to the risk that a transaction later characterised as unauthorised capital account activity is treated as a contravention, notwithstanding the absence of laundering intent.

Third, and most significantly, the PMLA's enforcement architecture provisional attachment and the Enforcement Directorate's search, seizure, and arrest powers operate more coercively than ordinary criminal procedure. The Supreme Court has upheld this architecture, notwithstanding criticism that reversing the presumption of innocence at the bail stage, and withholding the Enforcement Case Information Report from an accused, sits uneasily with due process under Article 21. For a founder implicated in a flagged remittance, funds and personal liberty may be constrained well before any adjudication of guilt.

Internationally, OFAC's extraterritorial reach is a distinct risk category: because much global remittance clears at some point through U.S. dollar correspondent banking, a startup with no U.S. presence can still find transactions frozen where an intermediary bank has sanctions exposure. This “long-arm” character of U.S. financial law is structural rather than aberrant, and startups routing dollar flows should treat it as a standing compliance variable.

Case Laws

Indian Judicial Precedents

In the case of Directorate of Enforcement v. Deepak Mahajan the Supreme Court decided that a Magistrate has the power to allow remand for someone arrested under the old FERA law. This is because the Magistrate can use the power given by Section 167(2) Cr.P.C. The Court said this is necessary so that there are no problems when it comes to enforcing economic laws. This decision is still very important today for the powers that enforcement officers have to arrest and detain people under the FEMA and PMLA laws. In another case Nikesh Tarachand Shah v. Union of India the Supreme Court said that the conditions for getting bail under Section 45(1) PMLA are not fair.

The Court said this is because the law looks at the sentence for the underlying crime, not how serious the money laundering is. The government fixed this problem with the 2018 Amendment Act, which was made to apply to cases by the Finance (No. 2) Act, 2019. The new version of the law was upheld in the case of Vijay Madanlal Choudhary v. Union of India. The Court also said that the Enforcement Directorate has the power to search, seize, arrest and attach properties. The Court decided that the Enforcement Directorate does not have to give the accused a copy of the Enforcement Case Information Report like they would with a FIR. All these decisions show how the courts have looked at the PMLA law and the powers of the Enforcement Directorate, which's important for anyone who is being investigated by the Enforcement Directorate because of a suspicious money transfer. The PMLA law and the Enforcement Directorate are still very important today.

International Regulatory Enforcement Precedents

In 2017 The Western Union Company said it did something wrong. It did not have a program to stop money laundering and it helped people commit fraud with money transfers. The Western Union Company had to give the U.S. The Department of Justice and the Federal Trade Commission have a lot of money, 586 million dollars. This was the amount of money that a money services business had to give up at that time. It happened because the people who worked with The Western Union Company helped people make transfers and launder money. In April 2019 Standard Chartered Bank got in trouble again.

It agreed to pay a lot of money, about 1.1 billion dollars to authorities in the United States and the United Kingdom. Standard Chartered Bank paid 639 million dollars to OFAC. The bank did something by letting people make transactions that were not allowed because of rules about Iran and some other places. This was not the time Standard Chartered Bank got in trouble for this. It had to pay for doing something in 2012. These things show that even good banks can get in trouble if they do not follow the rules about stopping money laundering. Even banks that follow the rules a lot can still get in trouble if they make mistakes. This shows how important it is for banks to be careful when they work with companies that help people move money across borders. The Western Union Company and Standard Chartered Bank are examples of what can happen if companies are not careful, with money transfers.

Practical Implications

For startups, cross-border remittance compliance can no longer be a back-office function addressed after commercial terms are settled. Early engagement with an Authorised Dealer bank, accurate purpose-code classification of remittances, and, for payment-aggregation models, a realistic assessment of whether PA-CB net-worth and licensing thresholds are commercially viable, are now threshold questions in business-model design.

Figure 1 reflects the author's illustrative categorisation of risk-exposure areas for a startup handling cross-border remittances and is presented for analytical clarity, not as empirical survey data.

A recurring consequence of AML and sanctions risk is “de-risking” - risk-averse institutions withdrawing or declining banking and payment-gateway relationships rather than undertaking enhanced due diligence. Startups in remittance corridors perceived as higher-risk, or transacting with counterparties in FATF - monitored jurisdictions, are disproportionately exposed, regardless of their own compliance record.

Industry bodies have argued for a graded, volume-linked compliance framework rather than a uniform threshold, to avoid disadvantageing early-stage entrants, alongside greater interoperability between reporting owed to the RBI, the Financial Intelligence Unit-India, and tax authorities. Emerging changes with real-time connections like the India - Singapore UPI - PayNow corridor and the unclear way remittances with digital assets are handled show the system will keep changing. This means that checking and watching over the rules should be not just something done once.

Conclusion

Cross-border money transfers, for a business are not usually just one legal action; they are repeated transactions that are controlled at the same time by rules about moving money between countries, laws against illegal money flow rules about how payments work, taxes and when it involves dollars or euros laws, from other countries that control financial activities. The Indian framework FEMA, the LRS, the PA-CB Regulations, and the PMLA reflects a deliberate balance between liberalisation and risk control, but the resulting compliance burden does not fall evenly across market participants. Judicial precedent has, on balance, strengthened rather than curtailed PMLA enforcement powers, while international enforcement practice shows that even well-resourced institutions have struggled to maintain adequate controls.

For startups the best way to deal with problems when sending money across borders is to be prepared. This means knowing how to set up transactions, talking to banks and lawyers and keeping a close eye on what is happening. The people who make the rules should think about making it easier for startups to follow the rules. They should look at how much money's being sent and how risky it is, rather than having the same rules for everyone. They should also try to make it simpler for startups to report what they are doing to the people who regulate them. This way startups can focus on what they do which is to help people send money across borders without being held back by too many rules. The rules are in place to make sure everything is fair and honest. They should not be so tough that they stop startups from doing their job. Startups and cross-border remittance are meant to help people so the rules should help them not get in the way.

Author: Shreya Goswami in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References (Endnotes)

1. Foreign Exchange Management Act, 1999, No. 42 of 1999, §§ 3, 5, 6, 10, 11 (India).

2. Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (India).

3. Reserve Bank of India, A.P. (DIR Series) Circular No. 64, Liberalised Remittance Scheme (Feb. 4, 2004); RBI, Master Direction – Liberalised Remittance Scheme, FED Master Direction No. 7/2015-16 (as amended).

4. Reserve Bank of India, Regulation of Payment Aggregator – Cross Border, Circular No. CO.DPSS.POLC.No.S-786/02-14-008/2023-24 (Oct. 31, 2023).

5. Payment and Settlement Systems Act, 2007, No. 51 of 2007 (India).

6. Prevention of Money Laundering Act, 2002, No. 15 of 2003, §§ 3, 4, 5, 8, 12 (India).

7. Foreign Contribution (Regulation) Act, 2010, No. 42 of 2010 (India).

8. Income-tax Act, 1961, § 206C(1G) (India); Finance (No. 2) Act, 2024, withdrawing the 2% equalisation levy on e-commerce supply of services with effect from 1 August 2024.

9. Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations, Recommendation 16 (as updated).

10. Bank Secrecy Act, 31 U.S.C. § 5311 et seq. (U.S.).

11. Regulation (EU) 2015/847 of the European Parliament and of the Council on information accompanying transfers of funds; Directive (EU) 2015/2366 on payment services in the internal market (PSD2).

12. Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 (UK); Payment Services Regulations 2017, SI 2017/752 (UK).

13. Directorate of Enforcement v. Deepak Mahajan, 1994 AIR 1775 (S.C.) (India).

14. Nikesh Tarachand Shah v. Union of India, (2018) 11 SCC 1 (India).

15. Prevention of Money Laundering (Amendment) Act, 2018, No. 13 of 2018 (India); Finance (No. 2) Act, 2019, § 211 (India).

16. Vijay Madanlal Choudhary v. Union of India, 2022 SCC OnLine SC 929 (India).

17. U.S. Department of Justice, Office of Public Affairs, Press Release, Western Union Admits Anti-Money Laundering and Consumer Fraud Violations, Forfeits $586 Million in Settlement with Justice Department and Federal Trade Commission (Jan. 19, 2017).

18. U.S. Department of the Treasury, Office of Foreign Assets Control, Settlement Agreement between OFAC and Standard Chartered Bank (Apr. 9, 2019); U.S. Department of Justice, Press Release, Standard Chartered Bank Admits to Illegally Processing Transactions in Violation of Iranian Sanctions and Agrees to Pay More than $1 Billion (Apr. 9, 2019).