Prevention of Money Laundering Act, 2002

Prevention of Money Laundering Act, 2002 (Part 1)

• Introduction: The Prevention of Money Laundering Act, 2002 (PMLA) is the core of the legal framework in India to combat money laundering, with provisions that came into force on July 1, 2005.
• Objective: The objective of PMLA is to prevent money laundering and provide for the confiscation of property derived from or involved in money laundering.
• Key Provisions:
  • Section 3: Defines the offence of money laundering, including concealment, possession, acquisition, use, and projecting or claiming proceeds of crime as untainted property.
  • Section 4: Specifies the punishment for the offence of money laundering, which includes rigorous imprisonment for a term of not less than 3 years but which may extend to 7 years, and a fine.
  • Section 5: Empowers the Director or authorized officers to attach property suspected to be proceeds of crime for a period not exceeding 180 days.
  • Section 12: Obligates banking companies, financial institutions, and intermediaries to maintain records of all transactions, furnish information to the Director, and maintain records of client identity and beneficial ownership.
  • Section 12 AA: Requires reporting entities to conduct enhanced due diligence, including verification of client identity, examination of ownership and financial position, and recording the purpose behind specified transactions.
  • Section 12 A and 13: Confer powers on the Director to call for records, furnish information, and conduct inquiries to ensure compliance with PMLA provisions.
• Appeal Mechanism: Any person aggrieved by an order passed by the Director or the Adjudicating Officer under the PMLA may prefer to appeal to the Appellate Tribunal.

Prevention of Money Laundering Act, 2002 (Part 2)

• Definition: The Prevention of Money Laundering Act, 2002 (PMLA) is an Act of the Parliament of India that aims to prevent and control money laundering in India.
• Details: As per the PMLA Act and subsequent PMLA Rules notified under the Act, intermediaries are required to appoint a Principal Officer who is responsible for discharging legal obligations to report suspicious transactions to authorities.

Key Concepts

• Principal Officer: The Principal Officer is responsible for reviewing alerts received from regulators/exchanges and ensuring compliance with the provisions of the PMLA.
• Designated Director: A Designated Director is a person designated by the reporting entity to ensure overall compliance with the obligations imposed under the Act and Rules.
• SEBI Master Circular: The SEBI Master Circular on Guidelines on AML and CFT provides essential principles for intermediaries registered under the SEBI Act to prevent money laundering and terrorist financing.

Highlights of SEBI Master Circular

• Key Areas: The circular covers key areas such as client due diligence, anti-money laundering standards, and combating the financing of terrorism.
• Obligations: Registered intermediaries are required to establish policies and procedures to prevent money laundering and terrorist financing, and to ensure their effectiveness and compliance with all relevant legal and regulatory requirements.

Obligation to Establish Policies and Procedures

• Commitment: Senior management of a registered intermediary should be fully committed to establishing appropriate policies and procedures for the prevention of money laundering and terrorist financing.
• Policies and Procedures: The policies and procedures should include client acceptance policies, client due diligence measures, maintenance of records, compliance with relevant statutory and regulatory requirements, and cooperation with law enforcement authorities.

Client Due Diligence

• CDD Measures: The CDD measures comprise obtaining sufficient information to identify persons who beneficially own or control securities accounts, verifying the client's identity, and understanding the ownership and control structure of the client.
• Risk Management: Registered intermediaries should conduct ongoing due diligence and scrutiny to ensure that transactions are consistent with their knowledge of the customer, its business, and risk profile.

Written Anti-Money Laundering Procedures

• Parameters: Each registered intermediary should adopt written procedures to implement anti-money laundering provisions, including policy for acceptance of clients, procedure for identifying clients, risk management, and monitoring of transactions.
• Internal Audit: The internal audit function should be independent, adequately resourced, and commensurate with the size of the business and operations, organization structure, number of clients, and other such factors.

Prevention of Money Laundering Act, 2002 (Part 3)

• Customer Acceptance Policies: Registered intermediaries should develop customer acceptance policies and procedures to identify high-risk customers and apply Customer Due Diligence (CDD) on a risk-sensitive basis.
• Safeguards for Client Acceptance: The following safeguards should be followed while accepting clients:
  • No account should be opened in an anonymous or fictitious name.
  • Factors of risk perception should be clearly defined, including clients' location, business activity, and trading turnover.
  • Clients should be classified into low, medium, and high risk, with Clients of Special Category (CSC) requiring higher due diligence.
• Client of Special Category (CSC): CSC includes:
  • Non-resident clients
  • High net-worth clients
  • Trust, charities, and non-governmental organizations
  • Companies with close family shareholdings or beneficial ownership
  • Politically Exposed Persons (PEPs)
  • Clients in high-risk countries
  • Non-face-to-face clients
  • Clients with dubious reputations
• Client Identification Procedure (CIP): The Know Your Client (KYC) policy should clearly spell out the CIP to be carried out at different stages, including:
  • Establishing the intermediary-client relationship
  • Carrying out transactions for the client
  • When the intermediary has doubts about the veracity or adequacy of previously obtained client identification data
• Record Keeping: Registered intermediaries should ensure compliance with record-keeping requirements, including:
  • Maintaining records sufficient to permit reconstruction of individual transactions
  • Retaining information for accounts of customers, including beneficial owner, volume of funds, and origin of funds
  • Making customer and transaction records available to competent investigating authorities on a timely basis
• Retention of Records: Intermediaries should put in place a system for maintaining proper records of the nature and value of transactions, as prescribed under Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) guidelines and Prevention of Money Laundering (PML) Rules.

Prevention of Money Laundering Act, 2002 (Part 4)

• Record Keeping: The records mentioned in Rule 3 of PML Rules need to be maintained and preserved for a period of five years from the date of transactions between the client and intermediary.
• Client Information: The records evidencing the identity of clients and beneficial owners, as well as account files and business correspondence, shall be maintained and preserved for a period of five years after the business relationship between a client and intermediary has ended or the account has been closed, whichever is later.
• Suspicious Transaction Records: Records of information related to transactions, whether attempted or executed, which are reported to the Director, FIU – IND, as required under Rules 7 and 8 of the PML Rules, for a period of five years from the date of the transaction between the client and the intermediary.

Monitoring of Transactions

• Regular Monitoring: Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures.
• Understanding Client Activity: This is possible only if the intermediary has an understanding of the normal activity of the client so that it can identify deviations in transactions/activities.
• Complex Transactions: The intermediary has to pay special attention to all complex, unusually large transactions/patterns which appear to have no economic purpose.
• Internal Threshold Limits: The intermediary may specify internal threshold limits for each class of client accounts and pay special attention to transactions that exceed these limits.

Suspicious Transaction Monitoring & Reporting

• Definition of Suspicious Transaction: Intermediaries shall be guided by the definition of a suspicious transaction contained in PML Rules as amended from time to time.
• Illustrative List of Suspicious Transactions: SEBI has given an illustrative list of circumstances, which may be in the nature of suspicious transactions, including:
  • Clients whose identity verification seems difficult or clients that appear not to cooperate
  • Asset management services for clients where the source of the funds is not clear or not in keeping with the client’s apparent standing/business activity
  • Clients based in high-risk jurisdictions
  • Substantial increases in business without apparent cause
  • Clients transferring large sums of money to or from overseas locations with instructions for payment in cash
• Reporting Suspicious Transactions: Any suspicious transaction shall be immediately notified to the Designated/Principal Officer within the intermediary.

Reporting to Financial Intelligence Unit-India

• Cash Transaction Report (CTR): The CTR for each month shall be submitted to FIU-IND by 15th of the succeeding month.
• Suspicious Transaction Report (STR): The STR shall be submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash or a series of transactions integrally connected, are of suspicious nature.
• Non-Profit Organization Transaction Reports (NTRs): The NTRs for each month shall be submitted to FIU-IND by 15th of the succeeding month.
• Confidentiality: Utmost confidentiality shall be maintained in the filing of CTR, STR, and NTR to FIU-IND.

Designation of Officers

• Principal Officer: The Principal Officer is an officer designated by a registered intermediary who should be an officer at the management level.
• Designated Director: The registered intermediaries shall also designate a person as a 'Designated Director' to ensure overall compliance with the obligations imposed under chapter IV of the PMLA Act and the Rules.

Prevention of Money Laundering Act, 2002 (Part 5)

• Client Registration Process: The client registration process is crucial in preventing money laundering. It involves verifying the identity of clients and maintaining records of their transactions.
• Risk Management Control: Risk management control is essential in identifying and mitigating potential risks associated with money laundering. This includes implementing policies and procedures to detect and report suspicious transactions.
• SEBI Circulars: SEBI circulars provide guidelines for intermediaries to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) norms. These circulars outline the requirements for client registration, risk management, and reporting of suspicious transactions.

Case 9.2: SEBI vs. Shreepati Holdings & Finance Pvt. Ltd.

• Allegations: Shreepati Holdings & Finance Pvt. Ltd. (SHF) was alleged to have violated SEBI circulars dated December 31, 2010, January 24, 2013, and March 12, 2014, related to AML and CFT norms.
• Findings: The inspection found that SHF had delayed in updating its AML policy, did not have a system to monitor transactions, and did not maintain records of suspicious transactions.
• Conclusion: SHF was found to have violated SEBI circulars and was imposed a penalty of Rs. 3,00,000 under Section 15HB of the SEBI Act.

Case 9.3: FIU Delhi v/s Pay Pal

• Facts of the Case: PayPal was imposed a penalty of Rs. 96 lakh by the Financial Intelligence Unit (FIU) for alleged contravention of the anti-money laundering law.
• Allegations: PayPal was accused of concealing suspect financial transactions and abetting the disintegration of India's financial system.
• Findings: The FIU found that PayPal was involved in the handling of funds in India and qualified as a reporting entity under the PMLA.
• Conclusion: PayPal was directed to pay the fine and register itself as a reporting entity with the FIU, appoint a principal officer and director for communication within a fortnight of the receipt of the order.

Key Takeaways

• Importance of Compliance: Compliance with AML and CFT norms is crucial for intermediaries to prevent money laundering and terrorist financing.
• Risk Management: Implementing effective risk management controls is essential in identifying and mitigating potential risks associated with money laundering.
• Reporting Requirements: Intermediaries must maintain records of suspicious transactions and report them to the FIU in a timely manner.

Prevention of Money Laundering Act, 2002 (Part 6)

• Introduction: The Prevention of Money Laundering Act, 2002 (PMLA) aims to prevent and control money laundering in India. A recent case involved PayPal, where the Financial Intelligence Unit (FIU) imposed a penalty for not maintaining records of transactions.
• Key Points:
  • The Delhi High Court directed the Finance Ministry to constitute a committee to decide whether providers of payment gateway services should be classified as payment system operators.
  • The court stayed the FIU's order imposing a penalty on PayPal, subject to certain conditions, including maintaining records of all transactions in a secure server and depositing a bank guarantee.
  • The Centre set up a committee as directed by the court to examine whether a company like PayPal can be considered a payment system operator and a reporting entity under the PMLA.

Review Questions

• Record of Transactions:
  • Cash transactions of the value of more than Rs. 10 lakh need to be maintained under the PMLA.
• Cash Transactions Reports (CTR):
  • CTR for each month should be submitted to FIU-IND by the 15th of the succeeding month.
• Suspicious Transaction Report (STR):
  • The STR shall be submitted within 7 days of arriving at a conclusion that any transaction is of a suspicious nature.
• Written Anti-Money Laundering Procedures:
  • Written Anti-Money Laundering procedures should include:
    • Policy for acceptance of clients
    • Procedure for identifying the clients
    • Transaction monitoring and reporting, especially Suspicious Transactions Reporting (STR)
  • None of the above options are correct, as all these procedures are essential components of Anti-Money Laundering procedures.