Prevention of Money Laundering Act: Separating the Black From White
Basics
Money laundering has been in the economic system since time immemorial.
Money obtained through illegal means are legitimized by routing or investing or transferring in legitimate businesses or through banks and financial institutions. This is called money laundering. The origin of such money is illegal and unknown.
By this process, illegal money gets converted into clean money, though the source. By doing this, black money gets converted to white while prosecution and conviction can be avoided.
The Statute
- The Prevention of Money Laundering Act (“PMLA”) was enacted with the objective of:
– preventing money laundering
– confiscate and seize property obtained through laundered money
– deal with other related issues arising out of money laundering in India. - The Act came into force on in 2002. Thereafter the Act was amended in 2005, 2009 & 2012, 2015 & 2019.
- The Rules came into force in 2005.Thereafter it was amended in 2020 & 2023.
Recently
On 7th March 2023, the Ministry of Finance issued a Notification amending Prevention of Money Laundering (Maintenance of Records) Rules 2005. An insight into some of the crucial amendments:
Typical illegal sources – drug and human trafficking, cash and goods smuggling, terrorist activities and the like.
| Rule | Particulars | 2005 Rule | 2023 Rule (Amendment) | Observation / Remarks |
|---|---|---|---|---|
| Rule 2 (1) (cba) | Group | - | “group” shall have the same meaning as section 286 of 286(9)(e) of the Income-tax Act,1961 | Clause inserted. Under the IT Act “group” has been defined as a combination of the “parent entity” and all the entities in respect of which, a “consolidated financial statement” is required to be prepared. |
| Rule 2 (1) (cf) | Non- profit Organisation | means any entity or organisation that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a company registered under section 8 of the Companies Act, 2013. | means any entity or organisation, constituted for religious or charitable purposes referred to in Section 2 (15) of the Income-tax Act, 1961 that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a Company registered under the section 8 of the Companies Act, 2013 | Existing clause substituted. |
| Rule 2 (1) (db) | Politically exposed persons (PEPs) | - | individuals who have been entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials | Clause inserted. |
| Rule 3 (3A) | Implementation of policies by groups | Groups are required to implement group-wide policies for the purpose of discharging obligations under the provisions of Chapter IV of the PMLA 2002 | Clause inserted. | |
| Rule 9 (3)(a) | Determining Beneficial ownership/ Controlling ownership interest | Beneficial ownership / controlling ownership interest shall be determined in the following manner: Controlling ownership interest means ownership of or entitlement to more than 25% of shares or capital or profits of the company. | Beneficial ownership / controlling ownership interest shall be determined in the following manner: Controlling ownership interest means ownership of or entitlement to more than 10% of shares or capital or profits of the company. | Percentage in existing clause substituted. |
| Rule 9 (3)(e) | Determining Beneficial ownership/ Controlling ownership interest in a TRUST | where the client is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership | where the client is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership | Percentage in existing clause substituted. |
| Rule 9 (6)(vi) & (vii) | Documents to be submitted by Company | - | (vi) the names of the relevant persons holding senior management position; and (vii) the registered office and the principal place of its business, if it is different | Sub clauses inserted. Additional documentation required to be submitted |
| Rule 9 (7) (d) | Documents to be submitted by Partnership firm | - | (d) the names of all the partners and address of the registered office, and the principal place of its business, if it is different.”; | Sub clause inserted. Additional detlails required to be submitted. |
| Rule 9(8)(v) & (vi) | Documents to be submitted by Trust | - | (v) the names of the beneficiaries, trustees, settlor and authors of the trust and the address of the registered office of the trust; and (vi) list of trustees and documents as are required for individuals under sub-rule (4) for those discharging role as trustee and authorised to transact on behalf of the trust. | Sub clauses inserted. Additional documents / details required to be submitted. |
| Rule 9 (9A) | Registration by Bank or financial institution of its not-for-profit clients | - | Every Banking Company or Financial Institution or intermediary must register the details of a client, (if client is non-profit organisation) on the DARPAN Portal of NITI Aayog, if not already registered, and maintain such registration records for a period of 5 years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later. | Sub Rule inserted. |
| Rule 9 (9B) | KYC of such not for profit clients | - | Where the client has submitted any documents for the purpose of sub-rule (1), it shall submit to the reporting entity any update of such documents, for the purpose of updating the records mentioned under sub-rules (4),(5),(6),(7),(8) or (9), as the case may be, within 30 days of such updation. | Sub Rule inserted |
| Rule 9 (10) | Client acting on behalf of juridicial person | Where the client is a juridical person, the reporting entity shall verify that any person purporting to act on behalf of such client is so authorized and verify the identity of that person. | Where the client ‘purports to act on behalf of a juridical person or individual or trust’, the reporting entity shall verify that any person purporting to act on behalf of such client is so authorized and verify the identity of that person. | Sub Rule amended. |
The Impact
The PMLA (Maintenance of Records) Amendments Rules 2023 contains amendments that reduce the threshold (from 25% to 10%) of beneficial / controlling owners thereby bringing more such owners under the ambit of the PMLA. On the other hand, it has brought various entities / reporting entities have to submit a host of documents and details of their top management besides undertaking KYC compliance. Information must be provided of their registered office and principal place of business as well. Definitions such as “Non-profit organisation” has been brought in line with the Income Tax Act 1961. The amendment Rules in 2023 has introduced the concept of “Politically exposed persons” with the objective of ensuring increased transparency and accountability.
For Full Text of Notification:
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://egazette.nic.in/WriteReadData/2023/244194.pdf
