BENGALURU, March 1 (Reuters) - India's Financial Intelligence Unit (FIU) on Friday imposed a penalty of 54.9 million rupees ($662,565) on Paytm's banking arm, Paytm Payments Bank, for violations in reporting illegal money routed through its accounts, the country's finance ministry said.

The FIU initiated a review of Paytm Payments Bank after information from law enforcement agencies about some entities engaged in illegal acts, including organising and facilitating online gambling, and routing proceeds through the bank.

"The money generated from these illegal operations, i.e. proceeds of crime, were routed and channelled through bank accounts maintained by these entities with the Paytm Payments Bank," the ministry said in a statement.

The payments bank failed to report suspicious transactions and conduct due diligence of these accounts, the FIU's order said.

Based on the "voluminous" material available on record, it found that the charges against Paytm Payments Bank were substantiated, the ministry added.

The penalty pertains to issues within a business segment that was discontinued two years ago, a spokesperson for Paytm Payments Bank said. The company has since enhanced its monitoring systems and reporting mechanisms to the FIU, the spokesperson added.

Earlier in February, the Reserve Bank of India (RBI) had asked Paytm Payments Bank to wind down operations by March 15 due to persistent compliance issues and supervisory concerns.

Paytm had earlier said that it received notices for information and explanations from the authorities, including the financial crime fighting agency Enforcement Directorate, and was providing them the same.

Meanwhile, Paytm has cut some ties with its payments bank unit in an attempt to address compliance concerns that triggered a meltdown in its shares last month.

Paytm CEO Vijay Shekhar Sharma owns a 51% stake in Paytm Payments Bank, while Paytm owns the rest.

Earlier this week, Sharma stepped down as non-executive chairman and board member of the payments bank unit, as part of a major overhaul.

($1 = 82.8598 Indian rupees) (Reporting by Sethuraman NR and Nandan Mandayam in Bengaluru; Editing by Sohini Goswami and Maju Samuel)