Implications of Non-compliance of PMLA Obligations, Secrecy Obligations

A person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is involved in one or more of the following processes or activities connected with proceeds of crime, namely:— (a) concealment; or (b) possession; or (c) acquisition; or (d) use; or (e) projecting as untainted property; or (f) claiming as untainted property, in any manner whatsoever; the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever. Proceeds of crime mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.

Whosoever directly or indirectly attempts to indulge or knowingly assists or is a party or is involved in any process or activity connected with the 1[proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering.

Money laundering poses a serious threat to the stability of the financial system. All banks, financial institutions, and intermediaries dealing in financial activities play a crucial role in preventing illicit financial activities.  Thus, compliance with PMLA regulations is of vital importance for reporting entities in India due to several reasons. The non-compliance of these regulations can lead to severe penalties, as well as legal actions against the company and its executives.

The Director of Finance Intelligence Unit-India (FIU-IND) has the right to call for any records maintained under sections 11, 12(1), and 12AA of the Prevention of Money Laundering Act and any other information as he deems necessary for purposes of Prevention of Money Laundering Act – section 12A(1) of Prevention of Money Laundering Act. Actions can be initiated by the director of FIU against the Person Involved in Money Laundering. Seizure/freezing of property and records and attachment of property obtained with the proceeds of crime. Rigorous imprisonment for a minimum term of three years this may extend up to seven years and Fine (without any limit). For example, The finance ministry’s Financial Intelligence Unit-India (FIU-IND) imposed a fine of Rs 5.49 crore on Paytm Payments Bank on March 1, 2024, for “violating its obligations” under the Prevention of Money Laundering Act. Finance Ministry’s Finance Intelligence Unit-India (FIU-IND) has ordered a penalty of Rs. 18.82 crore against crypto exchange Binance on June 19 for not complying with the Prevention of Money Laundering Act (PMLA, 2002). As per FIU-IND, by operating as a virtual digital asset service provider, Binance becomes a ‘reporting entity’ under the PMLA. The authority found Binance non-compliant with the sections of the PMLA, 2002, and the PML (Maintenance of Records) Rules 2005 that pertain to keeping records of transactions and informing the authority of suspicious transactions.

Legal Consequences:

Director, Financial Intelligence Unit-India [FIU-IND], can call for records from the ‘reporting entity’. It shall be the duty of the reporting authority to furnish information requested in a specified time and manner – section 12A (2) of the Prevention of Money Laundering Act. The information shall be confidential except where its disclosure is required under any law – section 12A (3) of the Prevention of Money Laundering Act. Director, FIU-IND can impose fine if the reporting entity does not comply

The information shall be confidential except where its disclosure is required under any law – section 12A (3) of the Prevention of Money Laundering Act.

Whoever commits the offence of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to ten years (earlier provision of seven years had been substituted to ten years) and shall also be liable to fine.

 In addition to financial penalties, companies and individuals involved in non-compliant activities may face legal consequences, including prosecution and imprisonment. This can severely damage the company’s reputation and result in personal liabilities for executives.

Director, Financial Intelligence Unit-India [FIU-IND], can call for records from the ‘reporting entity’. Suppose he finds that the reporting entity has not complied with the provisions of section 12 of Prevention of Money Laundering Act. In that case, he can issue a warning, direct them to comply with specific instructions or impose a fine on them between Rs. 10,000 to Rs. one lakh. [section 13(2) of Prevention of Money Laundering Act].

Copy of the order shall be forwarded to the reporting entity or person who is a party under section 13(2) of the Prevention of Money Laundering Act.

Appeal against the order of the Director, Financial Intelligence Unit [FIU-IND], under the Ministry of Finance lies with Appellate Tribunal under section 26(2) of the Prevention of Money Laundering Act.

If the ‘reporting entity’ supplies the information, no civil proceedings can be taken limit against them for furnishing information to the Authority. It has been held that there is an implied term of the contract between the banker and the customer that the banker must not disclose the condition of his customer’s account except on reasonable and proper occasions.

Related Posts: