Prevention of Money Laundering Act, 2002

Prevention of Money Laundering Act, 2002 (Part 1)

• Introduction: The Prevention of Money Laundering Act, 2002 (PMLA) is a key legislation in India's fight against money laundering, with provisions coming into force on July 1, 2005.
• Objective: The primary 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 attempts to indulge, assist, or be involved in processes connected with the proceeds of crime.
  • Section 4: Specifies punishments for money laundering offences, including rigorous imprisonment and fines.
  • Section 5: Empowers the Director or authorized officers to attach properties suspected to be proceeds of crime for up to 180 days.
  • Section 12: Obligates banking companies, financial institutions, and intermediaries to maintain records, furnish information, and verify client identities.
  • Section 12 AA: Mandates enhanced due diligence for reporting entities, including verification of client identities and examination of ownership and financial positions.
  • Section 12 A and 13: Confer powers on the Director to call for records, furnish information, and conduct inquiries, with provisions for confidentiality and penalties for non-compliance.

Key Concepts

• Money Laundering: The process of concealing or disguising the origin of proceeds of crime to make them appear legitimate.
• Reporting Entities: Banking companies, financial institutions, and intermediaries required to maintain records and furnish information under PMLA.
• Specified Transactions: Transactions exceeding specified amounts, including cash withdrawals or deposits, foreign exchange transactions, and high-value imports or remittances.
• Enhanced Due Diligence: Additional steps taken by reporting entities to verify client identities, examine ownership and financial positions, and record transaction purposes.
• Penalties: Monetary penalties and other actions that may be taken against reporting entities or their employees for non-compliance with PMLA provisions.

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, intermediaries are required to appoint a Principal Officer who is responsible for reporting 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 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 guidelines for securities market intermediaries to prevent money laundering and terrorist financing.
• Client Due Diligence (CDD): CDD measures include obtaining sufficient information to identify persons who beneficially own or control securities accounts, verifying client identity, and understanding the ownership and control structure of the client.

Highlights of SEBI Master Circular

• Appointment of Principal Officer: Intermediaries registered under SEBI Act shall appoint a Principal Officer to ensure compliance with PMLA provisions.
• Client Acceptance Policy: Registered intermediaries should adopt client acceptance policies and procedures that are sensitive to the risk of money laundering and terrorist financing.
• Obligation to Establish Policies and Procedures: Senior management of registered intermediaries should establish policies and procedures for preventing money laundering and terrorist financing.
• Written Anti-Money Laundering Procedures: Each registered intermediary should adopt written procedures to implement anti-money laundering provisions.

Policies and Procedures

• Communication of Group Policies: Communication of group policies relating to the prevention of money laundering and terrorist financing to all management and relevant staff.
• Client Acceptance Policy: Client acceptance policy and due diligence measures, including requirements for proper identification.
• Maintenance of Records: Maintenance of records, including client identification and verification documents.
• Compliance with Statutory and Regulatory Requirements: Compliance with relevant statutory and regulatory requirements, including cooperation with law enforcement authorities.

Client Due Diligence

• Obtaining Sufficient Information: Obtaining sufficient information to identify persons who beneficially own or control securities accounts.
• Verifying Client Identity: Verifying client identity using reliable and independent sources of identification.
• Understanding Ownership and Control Structure: Understanding the ownership and control structure of the client.
• Ongoing Due Diligence: Conducting ongoing due diligence and scrutiny of transactions and accounts throughout the course of the business relationship.

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:
  • No account should be opened in an anonymous or fictitious name.
  • Factors of risk perception should be clearly defined, including client location, business activity, and payment methods.
  • Clients should be classified into low, medium, and high risk, with Clients of Special Category (CSC) requiring higher due diligence.
• Client Identification Procedure (CIP): The Know Your Client (KYC) policy should clearly outline 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 client's identity or previous information.
• Requirements for CIP:
  • Intermediaries should proactively determine whether a client or beneficial owner is a Politically Exposed Person (PEP).
  • Senior management approval is required for establishing business relationships with PEPs.
  • Reasonable measures should be taken to verify the sources of funds and wealth of clients and beneficial owners identified as PEPs.
• Record Keeping: Registered intermediaries should ensure compliance with record-keeping requirements, including:
  • Maintaining records sufficient to reconstruct 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 establish an internal mechanism for proper maintenance and preservation of records, allowing for easy and quick retrieval of data when requested by competent authorities.

Prevention of Money Laundering Act, 2002 (Part 4)

• Record Keeping: 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 Identification: 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.
• Suspicious Transaction Reporting: 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.

Key Concepts

• Customer Due Diligence (CDD): Intermediaries should apply CDD measures to existing clients on the basis of materiality and risk.
• Transaction Monitoring: Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures.
• Suspicious Transactions: Intermediaries shall ensure that appropriate steps are taken to enable suspicious transactions to be recognized and have appropriate procedures for reporting suspicious transactions.

Reporting Requirements

• 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.

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 Designated Director is a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the PMLA Act and the Rules.

Case Study

• SEBI vs Marfatia Stock Broking Private Limited: The case highlights the importance of having an AML policy in place and the consequences of non-compliance with regulatory requirements.

Prevention of Money Laundering Act, 2002 (Part 5)

• Introduction: The Prevention of Money Laundering Act, 2002 (PMLA) aims to prevent and control money laundering in India. The Act imposes obligations on reporting entities, including financial institutions, to maintain records and report suspicious transactions.
• Key Concepts:
  • Reporting Entity: A reporting entity is an entity that is required to report suspicious transactions to the Financial Intelligence Unit (FIU). This includes financial institutions, banks, and other entities that handle financial transactions.
  • Suspicious Transaction: A suspicious transaction is a transaction that appears to be unusual or suspicious and may indicate money laundering or other illegal activities.
  • Principal Officer: A principal officer is an officer who is designated by a reporting entity to be responsible for ensuring compliance with the PMLA.
  • Financial Intelligence Unit (FIU): The FIU is a government agency that is responsible for receiving and analyzing reports of suspicious transactions.

Case Studies

• Case 9.2: SEBI vs. Shreepati Holdings & Finance Pvt. Ltd.:
  • Facts: SEBI conducted an inspection of Shreepati Holdings & Finance Pvt. Ltd. (SHF) and found that SHF had delayed in updating its Anti-Money Laundering (AML) policy and had not maintained records of suspicious transactions.
  • Issues: The issues in this case were whether SHF had violated the provisions of SEBI Circulars and the PMLA, and whether the violation attracted a monetary penalty.
  • Conclusion: The Adjudicating Officer found that SHF had violated the provisions of SEBI Circulars and the PMLA, and imposed a penalty of Rs. 3,00,000 on SHF.
• Case 9.3: FIU Delhi v/s Pay Pal:
  • Facts: The FIU imposed a penalty of Rs. 96 lakh on PayPal for alleged contravention of the PMLA. PayPal was accused of concealing suspect financial transactions and abetting the disintegration of India's financial system.
  • Issues: The issues in this case were whether PayPal had violated the provisions of the PMLA, and whether the violation attracted a monetary penalty.
  • Conclusion: The FIU found that PayPal had violated the provisions of the PMLA and imposed a penalty of Rs. 96 lakh on PayPal.

Key Takeaways

• Importance of Compliance: The cases highlight the importance of compliance with the PMLA and SEBI Circulars. Reporting entities must maintain records and report suspicious transactions to the FIU.
• Consequences of Non-Compliance: The cases also highlight the consequences of non-compliance with the PMLA and SEBI Circulars. Non-compliance can result in monetary penalties and damage to the reputation of the reporting entity.
• Role of FIU: The cases demonstrate the role of the FIU in enforcing the PMLA and ensuring compliance by reporting entities. The FIU has the power to impose penalties and take other enforcement actions against non-compliant reporting entities.

Prevention of Money Laundering Act, 2002 (Part 6)

The Prevention of Money Laundering Act, 2002 (PMLA) aims to prevent and control money laundering in India. To achieve this, the Act requires certain entities to maintain records of transactions and report suspicious activities. However, some entities may try to technically escape being categorized as a reporting entity and avoid complying with the PMLA.

• Key Entities: Payment gateway services, such as PayPal, may be classified as payment system operators and considered reporting entities under the PMLA.
• Court Rulings: The Delhi High Court has directed the Finance Ministry to constitute a committee to decide whether providers of payment gateway services should be classified as payment system operators.
• Compliance: Entities like PayPal must maintain records of all transactions in a secure server and may be required to deposit a bank guarantee as a condition for staying a penalty order.

Review Questions

The following review questions test understanding of the PMLA requirements:

• Record of transactions to be maintained under the PMLA includes cash transactions of the value of more than Rs. 10 lakh.
• Cash Transactions Reports (CTR) for each month should be submitted to FIU-IND by the 15th of the succeeding month.
• The Suspicious Transaction Report (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 need to include:
  • Policy for acceptance of clients
  • Procedure for identifying the clients
  • Transaction monitoring and reporting, especially Suspicious Transactions Reporting (STR)