PMLA 2002 : Objectives & Applicability

 PMLA 2002: Objectives 

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005 . Director, FIU-IND and Director (Enforcement) have been conferred withexclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister

The Prevention of Money Laundering Act (PMLA) of 2002 has three main objectives:

1.       Prevent and control money laundering

2.       Confiscate and seize property obtained from laundered money

3.       Deal with other issues related to money laundering 

The PMLA and rules notified thereunder impose obligation on banking companies, financial institutions, and intermediaries and persons carrying on a designated business or profession, to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA is an act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.

PMLA 2002: Applicability 

“Reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

 

Anti-money laundering laws will be applicable to every individual or entity engaged in financial transactions. Sec.2(1)(ha) of Prevention of Money-Laundering Act, 2002 (inserted by Prevention of MoneyLaundering (Amendment) Act, 2012) defines “Client” as a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.

According to Sec.2(1)(s) of Prevention of Money-Laundering Act, 2002 "person" includes—

 

(i)             An individual,

(ii)       A Hindu undivided family,

(iii)      A company,

(iv)      A firm,

(v)       An association of persons or a body of individuals, whether incorporated or not,

(vi)      Every artificial judicial person not falling within any of the preceding sub clauses, and

(vii)    Any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses.

 

According to Sec.2(1)(wa) of Prevention of Money-Laundering Act, 2002 (inserted by Prevention of Money-Laundering (Amendment) Act, 2012) “Reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

Designated Business or Profession

Section 2(1)(sa) defines Person carrying on designated business or Profession means:

(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii) Inspector-General of Registration appointed under section 3 of the Registration Act, 1908, as may be notified by the Central Government;

(iii) Real estate agent, as may be notified by the Central Government;

(iv) Dealers in precious metals, precious stones and other high value goods, as may be notified by the Central Government;

(v) Person engaged in safekeeping and administration of cash and liquid securities on behalf of other person, as may be notified by the Central Government;

(vi) Person carrying on such other activities as the Central Government may by notification, so designate, from time to time.

Categorization of Reporting Entities after PMLA amendment

Banking companies	Financial Institutions	Intermediaries	DNFPBs
· Public sector banks · Private Indian banks  · Foreign banks · Co-operative banks  · Regional Rural banks	· Insurance companies · Hire purchase companies · Chit fund companies · Housing finance institutions · Non-banking financial companies · Payment system operator · Authorized persons · India Post	·Stock brokers; Subbrokers  · Share transfer agents · Registrars to issue · Merchant bankers · Underwriters  · Portfolio managers  · Investment advisers · Depositories and DPs · Custodian of securities · Foreign institutional investor · Venture capital funds · Mutual funds · Intermediary regulated by FMC · Intermediary regulated by PFRDA  · Recognized stock exchanges	·Casino · Registrar or Suregistrar · Real Estate Agent  · Dealer in precious metals, precious stones and other high value goods · Private Locker Operators  · Other activities as notified by the Central Govt. (Upon notification by the Central Govt.) Note: Registrars/Subregistrars, Casinos and Insurance brokers have been notified so far as DNFBPs.{source: FIU-Ind annual report 2015-16]

 

2. Ministry of Finance Notifications

The Ministry of Finance on 07.03.2023, issued the notification for amendment in Section 2(1)(sa) by virtue of power under Section 2(1)(sa)(vi).

The following activities when carried out for or on behalf of another natural or legal person in the course of business as an activity for the purposes of said sub sub-clause, namely:-

(i) exchange between virtual digital assets and fiat currencies;

(ii) exchange between one or more forms of virtual digital assets;

(iii) transfer of virtual digital assets;

(iv) safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and

(v) participation in and provision of financial services related to an an issuer’s offer and sale of a virtual digital asset.

Explanation: For the purposes of this notification “virtual digital asset” shall have the same meaning assigned to it in clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961).

The Ministry of Finance on 03.05.2023, financial transactions carried out by a relevant person on behalf of his client, in the course of his or her professional, in relation to the following activities:

 

·         Buying and selling of any immovable property;

·         Managing of client money, securities or other assets;

·         Management of bank, savings or securities accounts;

·         Organisation of contributions for the creation, operation or management of companies;

·         Creation, operation or management of companies, limited liability partnerships or trusts and buying and selling of business entities, will be an activity for the purposes of the said sub-section.

Explanation 1: For the purposes of this notification ‘relevant person’ includes

 

·         an individual who obtained a certificate of practice under section 6 of the Chartered Accountants Act, 1949 (38 of 1949) and practicing individually or through a firm, in whatever manner it has been constituted;

·         an individual who obtained a certificate of practice under section 6 of the Chartered Accountants Act, 1980 (56 of 1980) and practicing individually or through a firm, in whatever manner it has been constituted;

·         an individual who has obtained a certificate of practice under section 6 of the Cost and Works Accountants Act, 1959 (23 of 1959) and practicing individually or through a firm, in whatever manner it has been constituted;

Explanation 2: For the purposes of this notification ‘firm’ shall have the same meaning assigned to it in sub-clause (i) of clause (23) of section 2 of the Income-tax Act, 1961 (43 of 1961).

The Notiflcation specifies that individual CA, CS and CWA working independently or through a Firm doing on behalf of a client activities in particular mentioned at (i) – (v) will fall under definition of 2(1)(sa) and thus will be further covered under Section 2(1)(wa).

The Ministry of Finance on 09.05.2023, issued another notification including activities carried on by a person on behalf of client, such person will fall under definition of Section 2(1)(sa):

 

·         acting as a formation agent of companies and limited liability partnerships;

·         acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnership;

·         providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;

·         acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and

·         acting as (or arranging for another person to act as) a nominee shareholder for another person

Exceptions are:

·         any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961 (43 of 1961); or

·         any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or

·         any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under clause (b) of sub-section (1) of section 7 of Companies Act, 2013 (18 of 2013); or

·         any activity of a person which falls within the meaning of an intermediary as defined in clause (n) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003).

"Banking company" means a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act. (Sec.2(1)(e) of Prevention of Money-Laundering Act, 2002) “Financial institution” means a financial institution as defined in clause (c) of section 45-I of the Reserve Bank of India Act, 1934 and includes a chit fund company, a housing finance institution, an authorised person, a payment system operator, a non-banking financial company and the Department of Posts in the Government of India. (Sec.2(1)(l) of Prevention of Money-Laundering Act, 2002)

On May 3, 2023, the government made further revisions to the PMLA, 2002. The changes broaden the money laundering law's application to include practicing chartered accountants (CA), company secretaries (CS), and cost and works accountants (CWA) who conduct financial transactions on behalf of their clients.

However, the updated definition of covered entities under the PMLA does not include lawyers and legal professionals.

After chartered & cost accountants and company secretaries, the government has now included directors of companies, partners of firms, trustees of express trusts as well as nominee shareholders as “reporting entities” under the Act. Even persons arranging these officials for another person will be reporting entities, according to the notification issued by the finance ministry late Tuesday[May 11, 2023]

Definitions

Intermediary

According to Sec.2(1)(n) of Prevention of Money-Laundering Act, 2002 (inserted by Prevention of Money-Laundering (Amendment) Act, 2012), “Intermediary” means –

(i)              a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992; or

(ii)             an association recognised or registered under the Forward Contracts (Regulation) Act, 1952 or any member of such association; or

(iii)            intermediary registered by the Pension Fund Regulatory and Development Authority; or

(iv)            a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956

Designated Business or Profession

“Person carrying on designated business or profession” means,—

(i)                 a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii)               a Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908, as may be notified by the Central Government

(iii)             real estate agent, as may be notified by the Central Government;

(iv)             dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government;

(v)               person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi)             person carrying on such other activities as the Central Government may, by notification, so designate, from time to time. (Sec.2(1)(sa) of Prevention of Money-Laundering Act, 2002 (inserted by Prevention of Money-Laundering (Amendment) Act, 2012

Politically Exposed Person (PEP)

 Under the modified PML Rules, the Finance Ministry defined PEPs as "individuals who are or 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" [March 2023]

Implementation of EDD procedures when entering into business relationships with Politically Exposed Persons (“PEPs”). For the purposes of these guidelines ‘PEP’ shall have the same meaning assigned to it as per rule 2(1) (db) of PMLR.

Non-Govt Organisations (NGOs)

 The financial institutions will also have to register details of their NGO clients on the Darpan portal of the Niti Aayog and maintain the record for five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later[March 2023]

Following this amendment, banks and financial institutions will now have to not only maintain records of financial transactions of PEPs and NGOs but also share them with the Enforcement Directorate, as and when sought.

 Beneficial Ownership

 The amendments to PMLA rules also include tightening of the definition of beneficial owners under the anti-money laundering law and mandating reporting entities like banks and crypto platforms to collect information from their clients.

As per the amendments, any individual or group holding 10 per cent ownership in the client of a 'reporting entity' will now be considered a beneficial owner against the ownership threshold of 25 per cent applicable earlier in a company/15% for Partnership/Trust.[March 2023].

Under the anti-money laundering law, 'reporting entities' are banks and financial institutions, firms engaged in real estate and jewellery sectors. They also include intermediaries in casinos and crypto or virtual digital assets.

Obligation of Regulated Entity(RE)

So far, these entities were required to maintain KYC details or records of documents evidencing the identity of their clients as well as account files and business correspondence relating to clients. They are required to maintain a record of all transactions, including the record of all cash transactions of more than Rs 10 lakh.[March 2023]

 

Happy Reading

Those who read this, also read:

1. Obligations by RE under PMLA 2002

2. Offence of Money Laundering  : PMLA 2002

3. Reports by RE under PMLA 2002

4. Progress of Criminalisation: AML/CFT - India