India Spreading the Claws to Fight Against Money Laundering

The Prevention of Money Laundering Act, 2002 (“PMLA”) read with the rules made thereunder, the Prevention of Money Laundering Rules, 2005 (“PMLR”), was not just a piece of legislation in India rather it embarked a step taken by the Government of India to fight against financial and white-collar crime. Since the time it has been introduced with each passing year it has only widened its net to giving a clear message that money laundering, financial crimes, terrorist financing would not be tolerated.

The year 2023 has been a roller coaster ride and a milestone in implementing Financial Action Task Force (“FATF”) compliance by India not only to letter but also to the spirit with an aim to equip, enable, excel and empower our country to fight against financial crimes meeting global standards. One of such initiative in the past couple of months was introduction of the Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules, 2023by Ministry of Finance, Department of Revenue vide notification no. G.S.R. 745(E) dated 17^th October 2023 (“the Amendment Rules”).

Highlights of the Amendment Rules:

Implementation of a group-wide policy

Every reporting entity, which is a part of a group, shall implement group-wide programs against money laundering and terror financing, including group-wide policies for sharing information required for the purposes of client due diligence and money laundering and terror finance risk management and such programs shall include adequate safeguards on the confidentiality and use of information exchanged, including safeguards to prevent tipping-off. Groups are required to implement group-wide policies for discharging obligations under PMLA.

Impact of amendment: As per Rule 3A of the PMLR, groups are required to implement group-wide policies for the purpose of discharging obligations under the PMLA.

The Amendment Rules require every reporting entity which is part of a group to implement group-wide programs against money laundering and terror financing. This includes group-wide policies for sharing information required for the purposes of client due diligence and money laundering and terror finance risk management. It is pertinent to note that this is in addition to the erstwhile requirement by the groups implementing group-wide policies.

Reporting entity’s responsibility to obtain information on immediate basis from third party or the Central KYC Records Registry

Every reporting entity which relies on a third party for identification of the client shall be required to obtain from the third party or the Central Know Your Client (“KYC”) Records Registry, the records and information for Client Due Diligence (“CDD”) on an immediate basis.

Impact of amendment: Another significant change introduced by the Amendment Rules relates to the timeline of processes to be followed if the reporting entity has outsourced the identification of the client or obtaining records of a client to a third-party entity.  Previously, reporting entities were obligated to secure these records within a period of two days. However, the recent amendment mandates the immediate acquisition of such records or information from the third-party, eliminating the grace period of two days granted previously. This amendment will necessitate the reporting entity to have robust, swift and efficient procedures for coordination and communication with the third-party sources. This amendment ratifies that time is an essence in upholding compliance with CDD obligations.

The principal officer of the reporting entity must promptly furnish information relating to suspicious transactions to director.

The principal officer of a reporting entity shall, on being satisfied that the transaction is suspicious, furnish the information promptly in writing by fax or by electronic mail to the Director in respect suspicious transaction. Furthermore, the Amendment Rules states that such information to be kept confidential by the reporting entity.

Impact of amendment: Previously, principal officer of the reporting entities were obligated to furnish information of suspicious transactions to the director appointed under PMLA within seven working days of becoming satisfied that the transaction is suspicious.  However, the recent amendment mandates prompt reporting and has done away with the period of seven days allowed earlier reiterating that prompt reporting is an integral part of the nation’s fight against white collar crimes.

Enhancement in scope and events with respect to client identification and verification requirements by the reporting entities.

The erstwhile rules stipulated the client identification and verification requirements by the reporting entities at the time of commencement of an account-based relationship. However the  Amendment Rules in addition to the time of commencement of account based relationship  has also stated that the reporting entities shall carry out such processes even while  there is a transaction  of an amount equal to or exceeding Indian Rupee  Fifty Thousand (INR 50,000/-) whether conducted as a single transaction or several transactions that appear to be connected, or any international money transfer operations, by the client.

Further the reporting entities have to verify the identity of their clients and beneficial owners by using reliable and independent sources of identification. The Amendment Rules also expects reporting entities to take reasonable steps to determine the nature of the customer’s business.

Conclusion:

The Amendment Rules introduced by law makers has brought about substantial changes in the reporting requirements of the reporting entity ranging from the timelines of the reporting, group anti money laundering and terrorist financing policies implementation along with subsequent reporting.

Streamlining and overhauling the responsibilities of reporting entities clearly stipulates the earnestness of the Government of India to fight against white collar crimes, money laundering and terrorist financing.  These amendments, which are designed to address the challenges of money laundering and terrorist financing by extending the scope of reporting requirements and strengthening the accountability of reporting entities, reiterating the commitment of our country not just being FATF requirement compliant but also on the fact that the country is not ready to have any shortcomings in its ability to combat money laundering.