Obligations and Procedures for Reporting Entities Under PMLA

Table of Contents

1. Reporting Entity shall keep records and inform Authority about suspicious transactions
2. Keeping records by ‘reporting entity’ and informing authority
3. Director can call for records and information from reporting entity
4. No civil liability on reporting entity if they report suspicious transactions

Check out Taxmann's Money Laundering Law Manual which provides 'complete coverage' of the law relating to Prevention of Money-laundering Act (PMLA), 2002. It encompasses the PMLA Act and a detailed guide that includes the background, reporting entities' obligations, and various authorities' roles. The book also covers over 15 Rules/Regulations and Directions under the PMLA. Additionally, it includes relevant notifications and a digest of case laws, making it an essential resource for understanding money laundering laws.

1. Reporting Entity shall keep records and inform Authority about suspicious transactions

Responsibility has been cast on ‘reporting entity’ to keep prescribed records and inform prescribed transactions to ‘Director’ who is authority appointed under the Act. [section 12 of Prevention of Money Laundering Act].

Director, Additional Director, Joint Director, Deputy Director or Assistant Director will be appointed under Prevention of Money Laundering Act. They have been given various powers under the Act.

Directorate of Financial Intelligence Unit, India [FIU-IND], under Ministry of Finance looks after this work.

‘Reporting entity’ means a banking company, financial institution, intermediary or a person carrying on a designated business or profession [section 2(wa) of Prevention of Money Laundering Act].

Banking company means banking company and cooperative bank to which Banking Regulation Act, 1949 applies. It also includes any bank or banking institution referred to in section 51 of Banking Regulation Act. [section 2(1)(e) of Prevention of Money Laundering Act].

Thus, cooperative banks are also covered, though, normally, cooperative banks are not covered under definition of ‘banking company’.

Verifying identity of client or beneficial owner with Aadhaar or passport or other document notified– Identity of client or beneficial owner with Aadhaar number (optionally) or passport or other document notified as per details specified in section 11A of PMLA inserted w.e.f. 25-7-2019.

Various authorities like BSE, NSDL, CDSL have been notified as ‘reporting entities’ for Aadhaar Authentication vide G.S.R. 261(E) dated 22-4-2020.

‘NSDL e-Governance Infrastructure Limited’ will undertake Aadhaar authentication service of the Unique Identification Authority of India under section 11A of the Prevention of Money-laundering Act, 2002 – Notification No. 784(E) dated 22-12-2020.

National Payments Corporation of India has been notified as reporting entity to undertake Aadhaar authentication service – Notification No. GSR 59(E) dated 28-1-2021.

In further Notification No. S.O. 3187(E) dated 13-7-2022 and No. SO 2119(E) dated 4-5-2023, RBI has empowered various companies and entities to authenticate Aadhaar number.

Authentication of Aadhaar using e-KYC Setu system to verify identity of client or beneficial owner – A system of Authentication of Aadhaar using e-KYC Setu system has been introduced vide Notification No. SO 5683(E) dated 6-12-2022. e-KYC Setu shall be a system put in place by National Payments Corporation of India (NPCI) to enable verification of identity of a client or its beneficial owner by a reporting entity through authentication under the Aadhaar Act without disclosing the Aadhaar number of the individual to the reporting entity.

NPCI shall ensure that the authentication is carried out using the Aadhaar number of the client as per the regulations laid down by UIDAI, without disclosing full Aadhaar number to the reporting entity, and after carrying out authentication, NPCI shall share the last four digits of the Aadhaar number of the client, along with his demographic details made available to it by UIDAI, digitally signed by it, with the reporting entity and the reporting entity shall carry out identification of the client based on the details provided by the client and NPCI.

A list of entities on-boarded for the purpose of carrying out the authentication using the e-KYC Setu shall be maintained by NPCI at http://npci.org.in/e-KYCsetu/ including the date from which they have been on-boarded.

Before on-boarding any entity for this purpose,  NPCI shall ensure that the entity satisfies all the requirements for carrying out authentication through the e-KYC setu. NPCI shall also ensure that the entity has requisite regulatory clearance, if required, to carry out the financial business for which it intends to authenticate identity of its clients.

1.1 Person carrying on designated business or profession

Definition of ‘reporting entity’ includes ‘Person carrying on designated business or profession’.

‘Person carrying on designated business or profession’ means

(i) person carrying on games of chance or casinos

(ii) Inspector General of Registration appointed under section 3 of the Registration Act, as may be notified by the Central Government [Till 1-8-2019, the words were – Registrar or sub-registrar under Registration Act]

(iii) Real Estate Agent

(iv) Dealer in precious metals, precious stones and other high valued items as may be notified’

(v) person engaged in safe keeping and administration of cash and liquid securities as notified by Central Government and

(vi) person carrying on such other activities as may be notified by Central Government [section 2(1)(sa) of Prevention of Money Laundering Act – words in italics inserted w.e.f. 1-8-2019].

Multi State Cooperative Society has been designated as a ‘person carrying on designated business or profession’ – Notification No. GSR 4(E) dated 4-5-2018.

Real Estate Agent as defined in section 2(zm) of RERA Act, having turnover of Rs 20 lakhs and above would be ‘person carrying on designated business or profession’ – Notification No. GSR 855(E) dated 29-11-2022 [earlier No. GSR 798(E) dated 28-12-2020].

Dealers of precious metals and precious stones, if they engage in cash transactions with customs of Rs. 10 lakhs and above would be ‘person carrying on designated business or profession’ – Notification No. GSR 799(E) dated 28-12-2020.

Business relating to virtual digital asset shall be activity under section 2(1)(sa)(vi) and will be held as ‘reporting entity’ – Business relating to virtual digital asset shall be activity under section 2(1)(sa)(vi) and will be held as ‘reporting entity’ – Notification No. S.O. 1072(E) dated 7-3-2023.

Related person and Practicing CA, CMA and CS carrying our financial transactions on behalf his client shall be activity under section 2(1)(sa)(vi) and will be held as ‘reporting entity’ – Related person and Practicing CA, CMA and CS carrying our financial transactions on behalf his client in respect of

(a) buying and selling of any immovable property;

(b) managing of client money,

(c) securities or other assets;

(d) management of bank, savings or securities accounts;

(e) organization of contributions for the creation, operation, or management of companies;

(f) creation, operation, or management of companies, limited liability partnerships or trusts; and

(g) buying and selling of business entities,  shall be activity under section 2(1)(sa)(vi) of PMLA Act.

– Notification  No. SO 2036(E), dated 3-5-2023.

Thus, they will be held as ‘reporting entity’ to keep prescribed records and inform prescribed transactions to ‘Director’ who is authority appointed under the PML Act. [section 12 of Prevention of Money Laundering Act].

Persons involved in company formation, running company, trust etc. are notified and will be held as ‘reporting entity’ – Following persons have been notified under section 2(1)(sa)(vi) of PMLA vide Notification No. SO 2135(E) dated 9-5-2023.

The following activities when carried out in the course of business on behalf of or for another person, as the case may be, as an activity for the purposes of section 2(1)(sa)(f) of PMLA, namely:—

(i) acting as a formation agent of companies and limited liability partnerships;

(ii) 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;

(iii) providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;

(iv) 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

(v) acting as (or arranging for another person to act as) a nominee shareholder for another person.

Explanation 1.—For removal of doubts, it is clarified that the following activities shall not be regarded as activity for the purposes of section 2(a)(sa)(vi) of PMLA—

(a) any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961; or

(b) any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or

(c) 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 as required under section 7(1)(b) of Companies Act, 2013; or

(d) any activity of a person which falls within the meaning of an intermediary as defined in section 2(1)(n) of the Prevention of Money-laundering Act, 2002 [Explanation renumbered as Explanation 1 w.e.f. 9-11-2023].

Thus, they will be held as ‘reporting entity’ to keep prescribed records and inform prescribed transactions to ‘Director’ who is authority appointed under the PML Act. [section 12 of Prevention of Money Laundering Act].

Explanation 2.—For the purposes of activities specified in notification  No. SO 2135(E) dated 9-5-2023, the Regulator within the meaning of rule 2(1)(fa) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, shall be the Director, Financial Intelligence Unit, India appointed under section 49(1) of the Prevention of Money-Laundering Act, 2002 [Explanation 2 inserted vide S.O. 4876(E) dated 9-11-2023].

Authority under rule 2(1)(fa) – CBI&C will be authority under rule 2(1)(fa) of Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

1.2 Intermediary

Definition of ‘reporting entity’ includes ‘intermediary’.

‘Intermediary’ means a stock-broker, *, share transfer agent, banker to issue, registrar to issue, merchant banker, underwriter, portfolio management, investment adviser and any other intermediary associated with securities market and registered with SEBI. It also includes association recognised under Forward Contract Regulation Act, intermediary appointed by PFDA and all recognised stock exchanges [section 2(1)(n) of Prevention of Money Laundering Act * – The words were ‘sub-broker’. These have been omitted w.e.f. 1-8-2019].

1.3 Payment system and payment system operator

Definition of ‘Financial Institution’ includes a payment system operator.

Payment system operator means a person who operates a payment system and includes his overseas principal [section 2(1)(rc) of Prevention of Money Laundering Act].

‘Payment system’ means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment of settlement service or all of them. Payment system includes systems enabling credit card operations debit card operations, smart card operations, money transfer operations or similar operations [section 2(1)(rb) of Prevention of Money Laundering Act].

Thus, it can be seen all possible avenues from which black money will be converted into white money have been covered.

2. Keeping records by ‘reporting entity’ and informing authority

The ‘reporting entity’ should maintain record of all transactions of nature and value as prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other. The information should be informed to Director, Financial Intelligence Unit-India [FIU-IND] (authority under the Act) within prescribed time – section 12(1) of Prevention of Money Laundering Act.

The records should be maintained and identity of clients should be verified. The information should be kept confidential.

The records should be maintained for five years from date of transaction or date of cessation of transactions between client and the reporting entity [section 12(3) of Prevention of Money Laundering Act]

Manner and procedure of furnishing information will be prescribed by Central Government [section 15 of Prevention of Money Laundering Act].

Director, Financial Intelligence Unit-India [FIU-IND], under Ministry of Finance has been appointed as Director to exercise exclusive powers under these provisions.

The address is – Director, FIU-IND, 6th floor, Hotel Samrat, Chanakyapuri, New Delhi 110 021 (http://fiuindia.gov.in).

Guidelines on anti-money laundering standards have been issued by Department of Revenue vide No. ISD/CIR/RR/AML/1/06 dated 18-1-2006.

2.1 Duty of reporting entity to carry due diligence in case of specified transactions

The reporting entity is required to carry due diligence in respect of specified transactions.

‘Specified transaction’ means –

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

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

(c) any transaction in high value imports or remittances

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

Explanation to section 12AA of Prevention of Money Laundering Act inserted w.e.f. 1-8-2019.

The term ‘as may be prescribed’ applies to all clauses i.e. (a) to (d) of definition of ‘specified transaction’.

2.2 Enhanced diligence by reporting entity undertaking specified transactions

Every reporting entity shall, prior to the commencement of each specified transaction, ensure following enhanced diligence—

(a) Verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 in such manner and subject to such conditions as may be prescribed. – – However, where verification requires authentication of a person who is not entitled to obtain an Aadhaar number under provisions of Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, verification to authenticate the identity of the client shall be carried out by such other process or mode, as may be prescribed.

Various authorities like BSE, NSDL, CDSL have been notified as ‘reporting entities’ for Aadhar Authentication vide G.S.R. 261(E) dated 22-4-2020.

‘NSDL e-Governance Infrastructure Limited’ will undertake Aadhaar authentication service of the Unique Identification Authority of India under section 11A of the Prevention of Money-laundering Act, 2002 – Notification No. 784(E) dated 22-12-2020.

National Payments Corporation of India has been notified as reporting entity to undertake Aadhaar authentication service – Notification No. GSR 59(E) dated 28-1-2021.

In further notification No. S.O. 3187(E) dated 13-7-2022 and No. SO 2119(E) dated 4-5-2023, RBI has empowered various companies and entities to authenticate Aadhaar number.

(b) take additional steps to examine the ownership and financial position, including sources of funds of the client, in such manner as may be prescribed.

(c) 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 – section 12AA(1) of Prevention of Money Laundering Act inserted w.e.f. 1-8-2019.

2.3 Transaction not to be undertaken if conditions of enhanced diligence not satisfied

Where the client fails to fulfil the conditions laid down under section 12AA(1) of Prevention of Money Laundering Act, the reporting entity shall not allow the specified transaction to be carried out – section 12AA(2) of Prevention of Money Laundering Act inserted w.e.f. 1-8-2019.

2.4 Closer scrutiny and monitoring if specified transaction appears suspicious

Where any specified transaction or series of specified transactions undertaken by a client is considered suspicious or likely to involve proceeds of crime, the reporting entity shall increase the future monitoring of the business relationship with the client, including greater scrutiny or transactions in such manner as may be prescribed – section 12AA(3) of Prevention of Money Laundering Act inserted w.e.f. 1-8-2019.

2.5 Information in respect of specified transactions to be kept for five years

The information obtained while applying the enhanced due diligence measures under section 12AA(1) of Prevention of Money Laundering Act shall be maintained for a period of five years from the date of transaction between a client and the reporting entity – section 12AA(4) of Prevention of Money Laundering Act inserted w.e.f. 1-8-2019.

2.6 What is KYC

KYC is of international origin. It was originally proposed by Federal Deposit Insurance Corporation (USA). It requires banks and financial institutions to monitor customers’ accounts and report any unusual transactions to federal investigators. Now, KYC is being promoted by international organisation known as ‘Financial Action Task Force’ (FATF) in compliance with international treaties. Many countries are members of FATF, which is supported by Interpol, WCO and UNDCP (UN international Drug Control Programme).

e-Aadhaar card as valid document for KYC – e-Aadhaar card will be treated as valid document under Prevention of Money Laundering Rules. The mode of verification has been clarified in RBI AP (DIR) Circular No. 10 dated 21-7-2014.

Financial Action Task Force (FATF) Guidelines – Financial Action Task Force (FATF), Paris have issued public statement on 22-6-2012 giving guidelines relating to transactions with specified countries.

Combating Financing of Terrorism – Combating Financing of Terrorism CFT) is another purpose of KYC for which guidelines have been issued.

3. Director can call for records and information from reporting entity

Director, Financial Intelligence Unit-India [FIU-IND] can call for any records maintained under sections 11, 12(1) and 12AA of 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.

It shall be duty of reporting authority to furnish information asked for in specified time and manner – section 12A(2) of Prevention of Money Laundering Act.

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

3.1 Director, FIU-IND can impose fine if reporting entity does not comply

Director, Financial Intelligence Unit-India [FIU-IND], can call for records from ‘reporting entity’. If he finds that reporting entity has not complied with the provisions of section 12 of Prevention of Money Laundering Act, he can issue warning, direct to comply with specific instructions or impose 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 reporting entity or person who is a party under section 13(2) of Prevention of Money Laundering Act.

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

4. No civil liability on reporting entity if they report suspicious transactions

If ‘reporting entity’ supplies the information, no civil proceedings can be taken against them for furnishing information to Authority. [section 14 of Prevention of Money Laundering Act].

It has been held that there is implied term of contract between banker and customer that the banker must not disclose the condition of his customer’s account except on reasonable and proper occasions. – Tournier’s In re (1924) 1 KB 461.