PMLA Changes Raise Scrutiny of Certain Individuals and NGOs, Ropes in Cryptocurrency Trade

New Delhi: The Finance Ministry has amended money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries. In addition, it has defined “Politically Exposed Persons” (PEPs) under the Prevention of Money Laundering Act (PMLA) in line with the recommendations of the Financial Action Task Force (FATF).

According to a report published in The Indian Express, the new clause in the rules for PMLA compliance defines “Politically Exposed Persons” as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”. The amendment is in relation to foreign PEPs and not domestic ones.

The move to define politically exposed persons under PMLA is to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for Know Your Customer (KYC) norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms, officials said.

A senior government official told The Indian Express, “PEP has already been in the RBI’s master circular, in line with FATF. The definition has now been given in the PMLA rules so that the same definition is applicable everywhere.” 

The amended rules have also lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner, in line with the Companies Act and Income-tax Act.

The term ‘beneficial owner’ was defined to mean ownership of or entitlement to more than 25 % of shares or capital or profit of the company, which has now been reduced to 10% thereby bringing more indirect participants within the reporting net.

Also, reporting entities are now required to register details of the client if it’s a non-profit organisation on the DARPAN portal of NITI Aayog. “Every Banking Company or Financial Institution or intermediary, as the case may be, shall register the details of a client, in case of client being a non-profit organisation, on the DARPAN Portal of NITI Aayog, if not already registered, and maintain such registration records for a period of five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later,” the notification said.

The definition of a non-profit organisation has also been amended and linked to the definition of charitable purpose provided under Section 2(15) of the Income Tax Act, 1961 to include any entity or organisation, constituted for religious or charitable purposes under I-T Act, that is registered as a trust or society under the Societies Registration Act or any similar state legislation or a company registered under the Companies Act.

The due diligence documentation requirements, which were until now limited to obtaining the basic KYCs of clients such as registration certificates, PAN copies and documents of officers holding an attorney to transact on behalf of the client, have now been extended.

It now includes submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlers and authors, as the case may be, depending upon the legal form of organisation. Also, the details of the registered office address and principal place of business are now required to be submitted by clients to financial institutions, banking companies or intermediaries.

The notification also brings transactions involving crypto assets under the PMLA. It laid out the nature of transactions to be covered under PMLA. These are as follows: Exchange between virtual digital assets and fiat currencies; exchange between one or more forms of virtual digital assets; transfer of virtual digital assets; safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

However, experts have flagged some concerns. According to a report in The Hindustan Times, Manavendra Mishra, partner at Khaitan & Co, said, “The amendment aims to broaden the scope of the definition of such a beneficial owner of an entity and provides a revised reporting mechanism. The definition of PEP, however, leaves a lot to interpretation and in the absence of clear markers as to what rank, up to how much time after demitting office etc., would an individual be considered a PEP, it would give the authority too much discretion. Such discretion, if not checked, could easily be misused and it would be best to define the ambiguities left in this amendment.”

According to the new rules, NGOs are now required to maintain records of all transactions above Rs. 20,000 (approximately $270 USD), including receipts and disbursements. These records must be maintained for a period of five years from the date of the transaction.

NGOs are also required to provide information on the nature of the transaction, the amount of the transaction, the date of the transaction, and the identity of the person or entity involved in the transaction.

The changes have been criticised by some NGOs, who claim that the new rules are burdensome and will impede their work. However, the government has defended the changes, stating that they are necessary to prevent money laundering and other financial crimes.

The changes to the PMLA rules have been welcomed by some, who believe that they will help to prevent financial crimes and corruption. However, others have raised concerns about the potential for abuse, particularly if the rules are used to target individuals or organisations for political reasons.