Dealers in Precious Metals & Precious Stones - AML/CFT

 

As per the provisions of the PMLA 2002, all designated Non-Financial Businesses and Professions (DNFBPs), which include dealers in precious metals and precious stones (DNMS) who are the Reporting Entities (REs), shall have to adhere to client account opening procedures and maintain records of such transactions as prescribed by the PMLA and the rules notified there under.

The Unlawful Activities (Prevention) Act, 1967 (as amended) requires all dealers in precious metals and precious stones (DPMS), irrespective of whether they are reporting entities under PMLA or not, to prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Prevention and Suppression of Terrorism (implementation of Security Council Resolutions) Order, 2007 or any other person engaged or suspected to be engaged in terrorism and thus prohibits them from entering into a transaction with a client whose identity matches with any person in the sanction list or with banned entities and those reported to have links with terrorists or terrorist organisations. Similarly, all of the above applies to The Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005.

It must be borne in mind that the PMLA has not just been sprung suddenly on the gold and diamond industry. It has been in existence in an earlier avatar since 1967. Now, apart from precious metals dealers and precious stones dealers, even chartered accounts, etc. have come under the purview of the act and come under Non-Financial Businesses and Professions (DNFBPs). They now fall under the REs (reporting entities) and cannot hide behind client confidentiality.

With India being one of the largest consumers of gold (importing on an average 800 tonnes of gold per annum, add the other precious metals and the quantum of precious metals imported into the country is huge) and being the largest processor of rough diamonds in the world (14 out of 15 diamonds being processed in India), the volume of trade could be of gargantuan proportions. The sheer volume of accounts that are to be opened as well as the transactions to be monitored by the DPMS cannot even be imagined. This includes only gold and diamonds and no other precious metals and other precious stones.

The nature of the bullion, jewellery and stones business, the market structure and high transaction value makes our industry vulnerable to Money Laundering activities. Our industry products generally have high value and can be exchanged for money easily across the country. It is difficult to track movement of precious metals and stones. These factors make jewellery industry an attractive means of money laundering activities. Hence FATF and Indian Government have introduced relevant regulations to combat such activities. These regulations run parallel to the global AML/CFT regulations

The India PMLA regulation are applicable to all categories of dealers in precious metals and Stones The relevant businesses can be listed as follows: 

• Precious Metals Refiners and processors 

• Bullion traders

• Jewellery manufacturers 

• Jewellery wholesalers 

• Jewellery retailers (All formats: Online, Chain Stones, Franchises and single stores) 

• Diamond manufacturers and trader 

• Precious stones manufacturers and traders 

• Others

All dealers fall under the ambit of the PMLA, the turnover criteria are for dealers to choose their reporting mechanism for information sharing with FIU-India. Dealers having turnover over 500Crs are required to register directly with FIU-India and dealers having turnover below 500Crs have the option to register via Association/Council.

The obligations of dealers under the PMLA

The Government has laid down steps to be undertaken by dealers to discourage and prevent the misuse of their business for money laundering, terrorist financing or proliferation financing activities. 

Summary of Obligations:

 i. Mechanism for information sharing between Industry Councils and Associations and FIU-India 

ii. Policies and Procedures to Combat Money Laundering, Counter Terrorist Financing and Combat Proliferation Financing: (AML/CFT/CPF Program)

iii. Internal policies, procedures, and controls signed off by the Board/ Top Management of the Dealer

 iv. Appointment of a Nodal Officer for the purpose of interaction and information sharing with FIU-India 

v. Training of Dealers 

vi. Client due Diligence (CDD) Norms/ Enhanced Due Diligence (EDD) Norms 

vii. Sanctions screening

Procedure for  compliant with PMLA Regulations

Dealer need to follow few important steps to become PMLA compliant: 

Step 1: Register with FIU-India as per turnover requirements explained above. 

Step 2: Create a robust AML/CFT/CPF program in the form of a formal policy that has been accepted by the company board/managements/partners/owners this will enable dealers to Conduct EDD/CDD for transactions and activities.

Step 3: Training for top management and staff of dealers that is customised as per requirements to specific business types. 

Step 4: Sanctions screening to be carried out against customers (current and prospective) as well as suppliers etc., both at the time of on boarding as well as when transactions are initiated.

Authorities & Reporting 

PMLA regulation is applicable to every dealer in Precious Metals and Gems, Cash Transaction above 10Lacs is only the reporting threshold for information sharing with FIU-India. Further dealers have to report any suspicious transaction or any other reportable transaction and/or activities.

The Directorate General of Audit, Regulator under the aegis of The Department of Revenue, Ministry of Finance (MOF) Government of India. Under MOF, The ED is the primary authority responsible for investigating and prosecuting money laundering. The Financial Intelligence Unit – India (“FIU”) under the Department of Revenue, Ministry of Finance is the central national agency responsible for receiving, processing, analysing, and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

A reporting entity is a dealer in precious metals, precious stones as persons carrying on designated businesses or professions, that have registered with FIU-India for the purpose of reporting Transactions defined under the AML/CFT guidelines issued by Government of India, that Include:

• All Cash Transaction above INR 10Lacs or equivalent foreign currency 

• Sequential/Connected Cash transaction where monthly aggregate exceeds an amount of Rs. 10 lakh or its equivalent in foreign currency.

• All cash transactions where forged or counterfeit currency notes

• Suspicious Transaction including an attempted transaction, whether or not made in cash

Appointment of a Nodal Officer

Every dealer having gross annual turnover more than Rs. 500 Crore in previous financial year (e.g. FY 2022-23) must appoint a ‘Nodal Officer’ for the purpose of interaction and information sharing with FIU-India.  For the dealers having gross annual turnover less than Rs. 500 Crore in previous financial year (e.g. FY 2022-23), ‘Nodal Officer’ will be appointed by Industry Council and Association. The Nodal Officer would serve as a link between the dealers, Industry Councils and Associations, on one hand, and FIU-India, on the other hand for co-ordination and dissemination of information. The Nodal Officer would have access to FINGate mobile application

Cost of Non-Compliance

We have heard many dealers say that compliance to PMLA regulation will increase cost, drive away customers and impact business, however when you consider the cost of non-compliance dealers will realise that it is prudent to PMLA Compliant. Non-Compliance 

Regulatory Risk: 

• Investigation by the Regulatory Authorities and associated costs 

• Regulatory penalties 

• Termination of business licences and closure 

• Personal liability and/or imprisonment 

Reputational Risk: 

• Adverse publicity 

• Damage to reputation and brand Image 

Operational Risk: 

• Loss of business and companies would not like to deal with non-compliant businesses 

• Withdrawal of banking lines and funds on ground of non-compliance

Happy Reading,

Those who read this, also read:

      1. AML/CFT : Definitions, Origin

2. PMLA 2002: Objectives & Applicability

      3.Reports by RE under RBI: PMLA2002