Obligations of reporting entities under PMLA of 2002

Section 2[(wa) of PMLA Act 2002, states that a  “reporting entity” means a banking company, financial institution, intermediary, or a person carrying on a designated business or profession. The Ministry of Finance vide notification dated May 03, 2023 (‘Notification’) has widened the ambit of the term “Reporting Entity” as defined in Section 2(1)(wa), read with sec. 2 (1)(sa) of the Prevention of Money Laundering Act, 2002 (‘PMLA’). Under the above notification, the practicing corporate professionals (CAs, CSs, CMAs) are considered as reporting entities, if the said corporate professionals are carrying certain “financial transactions” on behalf of their clients. India has not enacted any special legislation for the governance of cryptocurrencies.  However, the PMLA has been amended by Notification (No. S.O. 1072(E) dated March 7, 2023), including intermediaries trading in Virtual Digital Assets (“VDAs”) and further qualifying them as Reporting Entities.  Further, it was clarified that “virtual digital asset” shall have the same meaning assigned to it in clause 47(A) of Section 2 of the Income Tax Act, 1961.

The RBI Master Direction and SEBI AML Guidelines mandate maintenance of “utmost confidentiality” in the filing of STRs with the FIU, and Reporting Entities are mandated to ensure that there is no tipping-off to the customer at any level.

According to the above guidelines, the Principal Officer of the reporting entity must supply information in respect of cash transactions (individual or connected) of the Prescribed Value, receipts by NPOs of more than the Prescribed Value, counterfeit currency transactions, and cross-border wire transfers of a value of more than INR 500,000 every month to the Directorate of Financial Intelligence Unit – India (FIU-IND) by the 15th day of the following month.

In the realm of risk management and compliance, Customer Due Diligence (CDD) is a pivotal player. The Customer Due Diligence meaning, often abbreviated as CDD, is a process that financial institutions, businesses, and other organisations use to gather information about their customers and clients to identify and mitigate risks such as money laundering, financing terrorism, and other illicit activities. There is no minimum investment threshold or category exemption available for Reporting Entities carrying out Customer Due diligence CDD measures prescribed under the PMLA of 2002 and PML Rules of 2005.

The Reporting Entities are required to conduct ongoing diligence on the client, and closely examine transactions to ensure that they are consistent with their knowledge of the client, the client’s business and risk profile, and, where necessary, the source of funds.  Furthermore, the Reporting Entity shall review the due diligence measures, including verifying again the identity of the client and obtaining information on the purpose and intended nature of the business relationship where there are suspicions of money laundering or financing of activities relating to terrorism, or where there are doubts about the adequacy or veracity of previously obtained client identification data.  Furthermore, the nature and extent of CDD depend on parameters such as the customer’s identity, social/financial status, the nature of the business activity, and information on the customer’s business and their location, etc., to enable the categorisation of customers into low, medium and high risk. To know more about how to carry out Customer Due Diligence (CDD) read: WHAT IS CUSTOMER DUE DILIGENCE (CDD) UNDER AML RISK MANAGEMENT IN BANKS?

Suspicious Transactions:

Rule 2(1)(g) of the Prevention of Money Laundering Act of 2002 (PMLA-2002) defines suspicious transactions as “A transaction whether or not made in cash which, to a person acting in good faith- (a) gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or (b) appears to be made in circumstances of unusual or unjustified complexity; or (c) appears to have no economic rationale or bonafide purpose, or (d) gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism.”

The Principal Officer of a Reporting Entity is under an obligation to supply information relating to suspicious transactions (in the form of STRs) to the office of the directorate of the FIU no later than seven working days after being satisfied that the transaction is suspicious. The Financial Intelligence Unit – India (FIU-IND) is the central, national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

For a detailed article on suspicious transactions, read: WHAT IS REPORTING OF SUSPICIOUS TRANSACTIONS BY BANKS UNDER PMLA?

Reporting obligations under FEMA

As per FEMA 1999, every Indian resident company that has made a Foreign Direct Investment (“FDI”) in the preceding year, including the current year, must submit a Foreign Liabilities and Assets Return. An Annual Performance Report is to be submitted by a resident individual who has made an Overseas Direct Investment (“ODI”). An Indian company that receives investment outside India for the issue of shares or other eligible securities under the FDI scheme must report all the details of the amount of consideration to the concerned Regional Office of the RBI through its Authorised Dealer (“AD”) category I bank within 30 days from the date the shares were issued.

An AD bank must record valid LEI for cross-border transactions of INR 50 crore and more undertaken through it on or after October 1, 2022.  The AD bank must report the valid LEI for all cross-border transactions, irrespective of the value of the transactions.  However, if the AD bank already has a valid LEI of the entity, it must report it for all transactions, irrespective of whether the entity has undertaken a transaction of INR 50 crore or above through it.

The Principal Officer must supply information relating to transactions in immovable property valued at more than INR 5,000,000 every quarter to the FIU by the 15th day of the month following the quarter (i.e. April, July, October, or January).

The obligation of reporting entities to effectively serve to prevent and impede money laundering and terrorist financing and to observe such internal controls not only by them but also by their Designated Director, officers, and employees is a legal requirement under Rule 7(4) of the PMLR.

Reporting entity to maintain records:

Every reporting entity shall maintain a record of all transactions, including information relating to transactions in such manner as to enable it to reconstruct individual transactions and furnish to the Directorate of Financial Intelligence Unit-India (FIU-IND)   within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed. The record of documents maintained evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

The PMLA of 2002 and PML Rules of 2005 prescribe the manner and period in which Reported Entities are required to maintain records.  Reporting Entities are mandated to keep the information relating to the transaction for five years from the transaction date between a client and the Reporting Entity.  Records relating to the identity of clients and beneficial owners, as well as account files and business correspondence, must be maintained for five years after the business relationship between the client and Reporting Entity has ended or the account has been closed, whichever is later.

Access to information:

Reporting Entity shall keep records and inform the Authority about suspicious transactions. FIU-IND Director can call for records and information from the reporting entity. No civil liability on the reporting entity if they report suspicious transactions.

Powers of Director to impose fine

The Director appointed under the PMLA has the power to look into the records from the bank, financial institutions, and intermediaries. If the Director finds out that the bank, financial institutions, or intermediaries have not kept the records, he/she can levy a fine ranging from Rs. 10,000 to Rs. 1, 00,000. The Directorate is empowered to investigate offences of money laundering and to take actions/prosecute persons in cases where it is proved. These actions are taken against the proceeds of crime derived from the Scheduled Offences listed under PMLA.

The maximum penalty for the commission of money laundering is rigorous imprisonment for a minimum period of three years, which may extend up to seven years with a fine.

The proceeds of crime involved in the money laundering related to any of the offences under the NDPSA (Narcotic Drugs and Psychotropic Substances Act, 1985), lead the offender to the maximum penalty is rigorous imprisonment for a minimum period of three years, which may extend up to 10 years with a fine.

The PMLA does not specifically provide for a limitation period concerning the offences therein.  In the absence thereof, the provisions of the Bharatiya Nagarik Suraksha Sanhita, 2023 (“BNSS”) may apply.  Section 514 does not prescribe any limitation period for offences punishable with imprisonment of more than three years.

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