PMLA & Rules (enacted 2003, effective from 2005)
Section 3 - Offence under PMLA
Reporting entities under PMLA
| Banking Companies | Financial Service Institutions | Financial Intermediaries | Designated Non-Financial Businesses and Professions (DNFBPs) | Virtual Digital Assets Service Providers |
|---|---|---|---|---|
| Public Sector | Non-Banking Financial Companies | Recognised Stock Exchange | Casinos | |
| Private Indian | Payment System Operator | Depositories | Inspector General of Registration | |
| Foreign Banks | Payment Aggregators | Stock Broker | Real Estate Agents | |
| Cooperative & Regional Rural Banks | Hire Purchase Cos. | Depository Participants | Dealers in Precious Metal and Stones | |
| Chit Funds Cos. | Mutual Funds | Professionals with ICAI, ICSI, ICMAI | ||
| Housing Finance Institutions | Credit Rating Agencies | |||
| India Post | Debenture Trustees | |||
| Insurance Companies | Share Transfer Agents | |||
| Registrar to Issue | ||||
| Portfolio Managers | ||||
| Underwriters | ||||
| Investment Advisors | ||||
| Custodian of Securities | ||||
| Foreign Institutional Investors | ||||
| Alternate Investment Funds | ||||
| Intermediaries regulated by PFRDA | ||||
| Insurance Brokers |
Reporting Entity’s obligations under PMLA, 2002
Section 12 (1) under Chapter IV and the PML (Maintenance of Records) Rules 2005, give rise to certain obligations which the bank must fulfil, which are as follows:
- Maintain a record of all transactions, including information relating to ‘prescribed transactions’ as stated/ covered under clause b), in such manner as to enable it to reconstruct individual transactions.
- Furnish to Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value as may be prescribed.
- Verify the identity of its clients
- Identify the beneficial owner
- Maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.
Section 12 (2) prescribes that every information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential.
Section 12 (3) The records referred to in clause (a) of sub-section (1) shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.
Section 12 (4) The records referred to in clause (e) of sub-section (1) shall be maintained for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.
Section 12 (5) The Central Government may, by notification, exempt any reporting entity or class of reporting entities from any obligation under this Chapter.
Regulatory Reports to be filed
| Name of Report | Transaction Coverage | Timeline |
|---|---|---|
| CTR | > Rs. 10.00 Lac/Month | 15th if succeeding month |
| STR | Suspicious Transaction / Activity | Promptly |
| CCR | Counterfeit Currency Notes | 15th of succeeding month |
| CBWTR | > Rs 5.00 Lac/Month | 15th of succeeding month |
| NTR | > Rs 10.00 Lac / Month | 15th of succeeding month |
For Registrars of Property: Quarterly Report of Purchase and Sale of Immovable Property of >/= Rs.50 lac by the 15 of the month succeeding the end of quarter.
RULES UNDER PML (Maintenance of Records) Rules 2005
The Central Government, in consultation with the Reserve Bank of India, had issued the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”), pertaining to maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information, and verification of client records of the banking companies, financial institutions and intermediaries.
Sec 2.1.ba. “Designated Director” means a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the Act and the Rules and includes –
- The Managing Director or a whole-time Director duly authorized by the Board of Directors if the reporting entity is a company,
- The managing partner if the reporting entity is a partnership firm,
- The proprietor if the reporting entity is a proprietorship concern,
- The managing trustee if the reporting entity is a trust,
- A person or individual, as the case may be, who controls and manages the affairs of the reporting entity if the reporting entity is an unincorporated association or a body of individuals, and
- Such other person or class of persons as may be notified by the Government if the reporting entity does not fall in any of the categories above.
Sec 2.1.g.”Suspicious transaction” means a transaction referred to in clause (h), including an attempted transaction, whether or not made in cash, which to a person acting in good faith-
- Gives rise to a reasonable ground of suspicion that it may involve proceeds of an offence specified in the Schedule to the Act, regardless of the value involved; or
- Appears to be made in circumstances of unusual or unjustified complexity; or
- Appears to have no economic rationale or bona fide purpose; or
- Gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism;
Sec 2.1.h. “Transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes
- Opening of an account;
- Deposits, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means;
- The use of a safety deposit box or any other form of safe deposit;
- Entering into any fiduciary relationship;
- Any payment made or received in whole or in part of any contractual or other legal obligation;
- Any payment made in respect of playing games of chance for cash or kind including such activities associated with casino; and
- Establishing or creating a legal person or legal arrangement
Sec 3. Maintenance of records of transactions (nature and value).
Amendements for alignmnet with FATF Recommendations
On March 07, 2023, the Central Government notified the Prevention of Money-Laundering (Maintenance of Records) Amendment Rules, 2023 (“Amendment Rules”), inter alia, incorporating some of the FATF Recommendations in the PML Rules. The key amendments are as follows:
Definition of 'group'
Amendment: The Amendment Rules have inserted the definition of ‘group’, referring to the definition thereof under the Income-tax Act, 1961.2 The definition refers to a parent entity and all entities for which, for reasons of ownership of control, in the country/territory where the parent entity is resident, consolidated financial statements are required to be prepared under law or accounting standards or would be required to be prepared if the equity shares of any of the entities were listed on a stock exchange.3 Further, the Amendment Rules incorporate an obligation on such groups to implement group-wide policies for discharging obligations under Chapter IV of the PMLA.4
Effect: Chapter IV of the PMLA levies certain obligations (including maintenance of records, reporting obligations, identity verification, due diligence) on reporting entities. While this amendment does not expand the requirement of fulfilling these obligations under the PMLA to all group entities, it requires a group-wide policy to be established to further the fulfilment of obligations by the relevant reporting entity within the group. This is in line with FATF Recommendation 18 (Internal controls and foreign branches and subsidiaries), which states that “financial groups should be required to implement group-wide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for AML/CFT purposes”.5
Definition of 'politically exposed persons'
Amendment: ‘Politically exposed persons’ are now defined under the PML Rules as “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”.6
Effect: The insertion of the definition is aligned with FATF Recommendation 12, which pertains to politically exposed persons.7 While the term is now defined in the PML Rules, it is not used or referred to anywhere else in the PML Rules itself. The insertion appears to be intended towards simply aligning the PML Rules with the Reserve Bank of India’s Master Direction – Know Your Customer (KYC) Direction, 2016 (“KYC Master Directions”), which provides for the same definition of politically exposed persons.8 These Master Directions, issued in relation to the PMLA and the PML Rules, set out certain enhanced due diligence requirements for accounts of politically exposed persons.
Tightening of beneficial ownership
Amendment: The definition of “controlling owner interest” (for the purposes of ascertaining the beneficial owner in a company that is a client of a reporting entity) has been amended to decrease the requirement of the ownership or entitlement to the shares or capital or profits of the company from 25% to 10%.9 Similarly, where the client of a reporting entity is a trust, the identification of a beneficial owner now includes identification of beneficiaries with 10% or more interest in the trust, down from the earlier 15%.10
Effect: Under Rule 9(1) of the PML Rules, every reporting entity is required to, at the time of commencement of an account-based relationship, determine whether a client is acting on behalf of a beneficial owner, identify the beneficial owner, and take all steps to verify the identity of the beneficial owner. Rule 9(3) of the PML Rules provides for the determination of whom a beneficial owner is. In this regard, where the client is a company, the beneficial owner is “the natural person(s), who, whether acting alone or together, or through one or more juridical person, has a controlling ownership interest or who exercises control through other means”.
Prior to the notification of the Amendment Rules, “controlling owner interest” was defined as having ownership or entitlement to more than 25% of shares or capital or profits of the company. This has now been brought down to 10%, widening the scope of a beneficial owner. This appears to be in line with the definition of ‘significant beneficial ownership’ under the Companies (Significant Beneficial Owners) Rules, 2018.11 It is interesting to note that this amendment takes place around the same time that the Securities and Exchange Board of India (SEBI) is reportedly “nudging” founders with a stake of 10% or more in their companies to classify themselves as promoters while filing a draft prospectus.12 It must be noted, however, that the KYC Master Directions, which are issued in relation to the PMLA and the PML Rules, still use the 25% threshold in the definition of beneficial owners.13 Presumably, the KYC Master Directions will be subsequently amended to align the same with the PML Rules.
This amendment will also have other consequences in terms of, for instance, KYC requirements for foreign portfolio investors (FPIs) at the time of registration, reclassification, etc. with SEBI. SEBI’s Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investor, issued on December 19, 2022, sets out KYC requirements for FPIs, including identification and verification of beneficial owners in accordance with the PML Rules.14
A similar decrease has been made in the interest threshold for beneficiaries of a trust. Notably, however, the corresponding thresholds for partnership firms and unincorporated associations or bodies of association have not been changed; these remain at the present 15%.15
Additional information/documentation requirement
Amendment: Additions have been made to the list of documents and information required to be submitted to reporting entities by their clients, including:
- for a company, the names of the relevant persons holding senior management position; and the registered office and the principal place of its business, if different;
- for partnership firms, the names of all partners and the address of the registered office, and the principal place of its business, if different; and
- for trusts, the names of the beneficiaries, trustees, settlor and authors of the trust and the address of the registered office of the trust; and list of trustees and documents as are required for individuals under Rule 9(4) of the PML Rules for those discharging role as trustee and authorised to transact on behalf of the trust.16
Effect: The Amendment Rules have now included additional information that is required to be submitted to the reporting entities, to assist with the reporting entities’ obligations pertaining to identity verification and identification of beneficial owners. The documents required for individuals under Rule 9(4) of the PML Rules include Aadhaar, PAN, and other documents as may be required by the reporting entity.
Registration on DARPAN portal
Amendment: Banking companies, financial institutions, and intermediaries are now required to register clients that are non-profit organisations on the DARPAN Portal of NITI Aayog, if not already registered, and maintain such registration records for a period of five years after the business relationship between the client and the reporting entity has ended or the account has been closed, whichever is later.17
Effect: The DARPAN portal is aimed at creating a repository of voluntary organisations (VOs) and non-governmental organisations (NGOs), with the purpose of facilitating collaboration between such entities and governmental departments and bodies. While it is not mandatory for NGOs to register on the portal, the unique ID generated upon registration is required when applying for governmental grants.18 The Amendment Rules now require non-profit organisations (as defined under the PML Rules) to be registered on the DARPAN portal.
Footnotes
- Chapter IV, Prevention of Money-Laundering Act, 2002.
- Rule 2(1)(cba), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Section 286(9)(e), Income-tax Act, 1961.
- Rule 3A, Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations, available at https://www.fatf-gafi.org/content/dam/recommandations/FATF%20Recommendations%202012.pdf.coredownload.inline.pdf.
- Rule 2(1)(db), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Ibid, note 5.
- Master Direction – Know Your Customer (KYC) Direction, 2016, Reserve Bank of India, available at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566.
- Rule 9(3)(a), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Rule 9(3)(e), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Rule 2(1)(h), Companies (Significant Beneficial Owners) Rules, 2018.
- Sebi moots promoter tag for founders holding 10%, Financial Express, available at https://www.financialexpress.com/market/sebi-moots-promoter-tag-for-founders-holding-10/3000403/.
- Ibid, note 8.
- Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors, Securities and Exchange Board of India, available at https://www.sebi.gov.in/legal/master-circulars/dec-2022/master-circular-for-foreign-portfolio-investors-designated-depository-participants-and-eligible-foreign-investors_66356.html.
- Rule 9(3)(b) and Rule 9(3)(c), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Rule 9(6), Rule 9(7), and Rule 9(8), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- Rule 9(9A), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
- NGO DARPAN, available at https://ngodarpan.gov.in/.