Section 13 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 13 lets the Director inquire into whether a reporting entity has met its obligations under Chapter IV. If the Director finds a failure by the reporting entity, its designated director on the Board or any of its employees, the Director may issue a written warning, give directions, call for periodic reports, or impose a monetary penalty of not less than ten thousand rupees but up to one lakh rupees for each failure.
This article reads the section from the consolidated text of the Act consulted (amendments shown up to 1 August 2019). Later amendments, rules and notifications should be checked; nothing after that date is stated here.
The Director may inquire, of his own motion or on an application, into a reporting entity's obligations under Chapter IV. In the course of an inquiry, the Director may direct an audit of records by a chartered accountant at the cost of the Central Government. On a finding of non-compliance, the Director may warn, direct, call for reports or impose a penalty of not less than ten thousand rupees but up to one lakh rupees for each failure, on the reporting entity, its designated director on the Board or any of its employees.
Sub-section (1): inquiry
The Director may, "either of his own motion or on an application made by any authority, officer or person, make such inquiry or cause such inquiry to be made, as he thinks fit to be necessary, with regard to the obligations of the reporting entity, under this Chapter".
The bracketed words were substituted by Act 2 of 2013, section 11 (w.e.f. 15-2-2013), as the footnote prints. The inquiry is about "the obligations of the reporting entity, under this Chapter", that is, Chapter IV. The obligations in that Chapter include those in section 12 on records, section 12AA on enhanced due diligence, and the duty to furnish information under section 12A. The text of section 13 does not list which sections it has in mind beyond "this Chapter".
The Director can act on his own motion or on an application by any authority, officer or person. The text consulted prescribes no form for the application and no time for the inquiry, and none should be assumed.
If your entity is the subject of an inquiry, or you want to know what a Director's inquiry can lead to, legal consultation support can help you read the position against the text. Our general guide on reporting entity obligations under PMLA gives a wider overview.
Sub-sections (1A) and (1B): audit by an accountant
Sub-sections (1A) and (1B) were inserted by Act 2 of 2013, section 11 (w.e.f. 15-2-2013).
- (1A) If at any stage of inquiry or any other proceedings before him, the Director, having regard to the nature and complexity of the case, is of the opinion that it is necessary to do so, he may direct the concerned reporting entity to get its records, as may be specified, audited by an accountant from amongst a panel of accountants maintained by the Central Government for this purpose.
- (1B) The expenses of, and incidental to, any audit under sub-section (1A) shall be borne by the Central Government.
The Explanation to the section says that, for the purposes of the section, "accountant" means a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949). The reader should check the current law for the corresponding provision of that Act.
The power is conditional: it depends on the Director's opinion that it is necessary, "having regard to the nature and complexity of the case". The accountant is chosen from the Central Government's panel, not by the reporting entity. The records to be audited are those "as may be specified". The text does not say by whom they are specified or in what manner.
Sub-section (2): what the Director may do on finding a failure
If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, "without prejudice to any other action that may be taken under any other provisions of this Act", he may:
| Clause | Action |
|---|---|
| (a) | Issue a warning in writing |
| (b) | Direct the reporting entity or its designated director on the Board or any of its employees to comply with specific instructions |
| (c) | Direct them to send reports at such interval as may be prescribed on the measures it is taking |
| (d) | By an order, impose a monetary penalty on the reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure |
Sub-section (2) was substituted by Act 2 of 2013, section 11 (w.e.f. 15-2-2013).
Three points follow from the wording.
- Who can be penalised. The reporting entity, its designated director on the Board, or any of its employees. The text does not define "designated director" in the part consulted for this article.
- Per failure. The penalty range is "for each failure". Two failures can mean two penalties, each within the range.
- Other action preserved. The opening words keep other actions under the Act open. Section 13 does not say that the penalty replaces any other consequence.
The actions are listed with "or" between (a), (b), (c) and (d). The text does not say whether more than one may be used for the same failure, and this article does not say.
Sub-section (3): copy of the order
The Director shall forward a copy of the order passed under sub-section (2) to every banking company, financial institution or intermediary or person who is a party to the proceedings under that sub-section. The sub-section names these categories; the reader should check section 2(1) for the definitions, as explained in our article on the reporting entity definitions.
Related provisions
| Provision | Link to section 13 |
|---|---|
| Section 12 | Records and information whose maintenance or furnishing is an obligation under Chapter IV |
| Section 12A | The duty to furnish information the Director requires |
| Section 14 | Protection for furnishing information, "save as otherwise provided in section 13" |
| The Maintenance of Records Rules | Rules 10A and 10B are covered in our article on rules 9A to 11 |
The Act as consulted does not state how an order under sub-section (2) can be challenged. Appeals and the other remedies are for the sections that deal with them, and this article adds none that the section does not print.
An illustration
The names are invented. The Director opens an inquiry into Bright Path Finance Ltd on an application by an authority. During the inquiry, the Director forms the opinion, having regard to the nature and complexity of the case, that the company's records should be audited, and directs an audit by a chartered accountant from the Central Government's panel at the Central Government's cost. The Director then finds that the company failed to comply with its obligations under the Chapter on two occasions. He may issue a written warning, direct specific instructions, call for periodic reports or impose a penalty within the printed range for each failure, and a copy of the order goes to the parties to the proceedings.
Need help with an inquiry or a penalty order?
A section 13 inquiry turns on which obligation is said to have been missed and on the records behind it. We can review the notice, the records and the position with you through legal consultation.
Key takeaways
- The Director may inquire into a reporting entity's obligations under Chapter IV, on his own motion or on an application.
- During an inquiry or other proceedings, the Director may direct an audit of specified records by an accountant from the Central Government's panel; the Central Government bears the expenses.
- "Accountant" means a chartered accountant within the meaning of the Chartered Accountants Act, 1949.
- On a finding of non-compliance, the Director may issue a warning, give directions, call for reports, or impose a monetary penalty.
- The penalty is not less than ten thousand rupees and may extend to one lakh rupees for each failure.
- A copy of the order goes to every banking company, financial institution, intermediary or person who is a party to the proceedings.
Read next
- Section 12: reporting entity to maintain records
- Section 12AA: enhanced due diligence for specified transactions
- Sections 14 and 15: protection for furnishing information and procedure for reporting
- Reporting Entity Obligations Under PMLA: CAs, Banks, NBFCs
Disclaimer: Based on the consolidated text of the Prevention of Money-laundering Act, 2002 published by the Enforcement Directorate, showing amendments up to Act 23 of 2019 (1 August 2019), and on the Department of Revenue consolidated copy of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 listing amendments up to 19 July 2024, as consulted on 2 October 2026. Later amendments, notifications, other rules and regulator directions should be checked. This article is general information, not legal advice; check the official text before acting.