Tag Archives: the Prevention of Money – Laundering Act

For reporting under the PMLA, every reporting entity shall appoint a “Designate Director.” According to Rule 2(1)(ba) of the PML (Maintenance of Record) Rules, 2005 (The Rules), a Designate Director is a person designated to ensure overall compliance under this law. Such Designate Director includes:

• Managing Director or Whole – time director duly authorised by the Board of Directors in case of a company;
• Managing Partner in case of the partnership;
• The proprietor in case of proprietorship concern;
• Managing Trustee in case of Trust;
• The individual who controls or manages the affairs in the case of an unincorporated entity; or
• Other person in case of other reporting entities.

As mentioned earlier, Official Valid Documents as per Rule 2(1)(d) are the passport, Driving Licence, Voter Identity Card, Job Card of NREGA, and Letter issued by the National Population Register. Some other documents are also listed where simplified measures are applied. For Address Verification, documents are utility bills not more than two months old, Property or Municipal tax receipts, Bank Account statements, pension or family pension payment orders or letters of allotment of accommodation issued by certain bodies, or leave or license agreements with these bodies.

One important person in the reporting process is the Regulator. For the person of these two notifications, Rule 2(1)(fa)(i) shall apply. Accordingly, a person or authority or government vested with the power to licence, authorise, register, regulate or supervise the activity of the reporting entity or the director as may be notified by the Government is the Regulator.

In our case, it may be the ICSI, ICAI, ICAI (Cost) or BCI may be the regulator for the respective profession or a person authorised by a notification.

Maintenance of the Record of Transactions

Now, there is another catch. Rule 3 is worded in such a manner as if it is designed for banks, financial institutions and market intermediaries. This required a record of transactions or series of transactions within a month of the value of more than ten lakh Rupees or its equivalent in foreign currency. Cross border transaction with a value of more than five lakh Rupees or its equivalent in foreign currency. Sale and purchase of immovable property valued at fifty lakh Rupees are also covered. All cash transactions with forged or counterfeit currency notes and other suspicious transactions are covered, irrespective of the value.

According to Rule 4, the record shall contain all necessary information specified by the Regulator to permit the reconstruction of individual transactions, including the following information:

• Nature of the transaction;
• Amount of the transaction and the currency in which it was denominated;
• Date on which the transaction was concluded; and
• The parties to the transaction.

The procedure and manner of maintaining the information are given in Rules 5. According to this Rule, the Regulator shall specify the procedure and manner of maintaining the information. Further, every reporting entity shall evolve an internal mechanism for maintaining the record.

Procedure and manner of furnishing information:

1. Every reporting entity shall communicate to the Director (under PMLA) the name, designation, and address of the Designated Director and the Principal Officer.
2. The Principal Officer shall report information under Rule 3 to the Director on the basis of the information available with the reporting entity and the copy of the information shall be retained by the principal officer for official record.

Furnishing information to the Director:

1. The Principal Officer shall furnish the information every month to the director by the 15^th day of the succeeding month.
2. In case of suspicious transactions, the Principal Officer shall furnish the information to the director within seven working days.

Client Due Diligence

Every Reporting entity shall, at the time of commencement of an account-based relationship, shall –

In all other cases, the reporting entity shall verify identity while carrying out transactions equal to or exceeding fifty thousand rupees or any international money transfer operation.

Every Reporting entity shall, within three days, furnish an electronic copy of the KYC record to CKYC Record and shall maintain a physical copy with itself. In these Rules, Aadhar and PAN are the main KYC Documents, with an option of other officially valid documents and photographs.

Where the client is a company, the documents required are a Certificate of Incorporation, MoA, AoA, Board Resolution and power of attorney granted to managers, officers or employees with KYC Documents of these individuals. A similar provision exists for Partnership firms, trusts, and unincorporated entities.

Under the reporting framework, a “reporting entity” has the following duties:

1. Verification of Identity by Reporting Entity;
2. maintain a record of all transactions;
3. Furnish information to the director; and
4. Due Diligence.

Verification of Identity by the Reporting Entity [Section 11]

Every Reporting Entity shall verify the identity of its clients and the beneficial owner by—

• if the reporting entity is a banking company;

It may be noted that under the PML (Maintenance of Record) Rules 2005, a Passport, Driving Licence, Voter card, Job Card under NREGA, and Letter under the National Population Register are valid documents.

This may be noted that using modes of identification shall be a voluntary choice of every client or beneficial owner sought to be identified. No client or beneficial owner shall be denied services for not having an Aadhaar number.

Reporting entity to maintain records [Section 12]

Every reporting entity shall—

(a) maintain a record of all transactions, including information relating to transactions covered in such manner as to enable it to reconstruct individual transactions;

(b) furnish to the Director 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;

(c) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

Every information maintained, furnished or verified shall be kept confidential.

Such record of transactions shall be maintained for five years from the date of transaction between the client and the reporting entity. The record evidencing identity shall be maintained for five years after the business relationship between a client and the reporting entity has ended.

Every reporting entity shall furnish to the Director such information as may be required by him. (Section 13)

Enhanced due diligence prior to specified transactions [Section 12AA]

Every reporting entity shall, prior to the commencement of each specified transaction:

• verify the identity of the clients undertaking such specified transaction using Aadhar;
• take additional steps to examine the ownership and financial position, including sources of funds of the client, and
• take additional steps as may be prescribed to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties.

Where the client fails to fulfil these conditions, the reporting entity shall not allow the specified transaction to be carried out.

For the purpose of the section “specified transaction” means prescribed transactions involving —

(a) any withdrawal or deposit in cash, exceeding such amount;

(b) any transaction in foreign exchange, exceeding such amount;

(c) any transaction in any high value imports or remittances; and

(d) such other transaction or class of transactions, in the interest of revenue or where there is a high risk or money-laundering or terrorist financing.

Procedure and manner of furnishing information by reporting entities [Section 15]

The Central Government may, in consultation with the Reserve Bank of India, prescribe the procedure and the manner of maintaining and furnishing information by a reporting entity.

During the last one month, there was a heated debate among accounting and legal professionals on two notifications issued by the Indian Ministry of Finance in May 2023. These two notifications first time bring these professionals within the reporting framework of the Prevention of Money – Laundering Act, 2002 (The Act/the PMLA).

With these two notifications, professionals like Company Secretaries, Chartered Accountants, Cost Accounts and Advocates come under the definition of “Reporting Entities.” Presently, banks, financial institutions and other intermediaries come into the definition of the Reporting Entities.

The Reporting Entities is defined under the Act in Section 2(1)(wa) as inserted with effect from 15 February 2013. It says the “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

The terms banking company defined in Section 2(1)(e), financial institutions in Section 2(1)(l), and intermediary in Section 2(1)(n) of the PMLA. For our analysis, the meaning of “a person carrying on a designated business or profession” is important.

Section 2(1)(sa) defines a person carrying on a designated business or profession in the following exhaustive terms:

“person carrying on designated business or profession” means,—
(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino; 

(ii) Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government;

(iii) real estate agent, as may be notified by the Central Government;

(iv) dealer in precious metals, precious stones and other high-value goods, as may be notified by the Central Government;

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

For the present discussion, sub-clause (vi) hereinabove is important.

Both notifications, dated 3 May 2023 and 9 May 2023, used this sub-clause for bringing legal and accounting professionals into the reporting framework of the PMLA.

The Notification S.O. 2036(E) dated 3 June 2023 brings certain activities carried out by the “relevant persons” including legal and accounting professionals, into the reporting framework. The Notification S.O. 2135(E) dated 9 May 2023 brings certain other activities carried out by any person into the reporting framework but excludes these activities when carried out by legal and accounting professionals.

So, prima facie, certain activities are included irrespective of the person carrying out these activities. For this discussion, Company Secretaries, Chartered Accountants, Cost Accounts and Advocates are the “Relevant Persons” as also mentioned in these notifications.

The 9 May 2023 Notification clarified that any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of a company to the extent of filing a declaration under Section 7(1)(b) of Companies Act, 2013 (18 of 2013) shall not be regarded as an activity for the purposes of Section 2(1)(sa)(vi) of the PMLA. So, the signing this declaration on the company incorporation form does not require reporting, but all other activities associated with incorporation may.

All other activities listed under these two notifications shall make the “relevant person” a “reporting entity.” These activities are:

• buying and selling of any immovable property;
• managing of client money, securities or other assets;
• management of bank, savings or securities accounts;
• organisation of contributions for the creation, operation or management of companies;
• creation, operation or management of companies, limited liability partnerships or trusts, buying and selling of business entities;
• acting as a formation agent of companies and limited liability partnerships;
• acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;
• providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;
• acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and
• acting as (or arranging for another person to act as) a nominee shareholder for another person.

The impact of these two notifications on the “relevant persons”- an advocate, a chartered accountant, cost accountant or company secretary in practice- becomes “reporting entities” under the PMLA for these activities so notified. The Reporting entities shall comply with the Reporting framework given under Chapter IV of the PMAL. We will discuss the Reporting Framework under the PMLA in the subsequent discussion.