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Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

In March 2023, the Ministry of Finance’s Department of Revenue introduced the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023. These rules expanded the scope of reporting entities under money laundering provisions to include non-governmental organizations (NGOs). They established a defined definition for politically exposed persons (PEPs) in alignment with the Financial Action Task Force (FATF) recommendations.

Under the new rules, reporting entities such as financial institutions, banking companies, and intermediaries must disclose beneficial owners and the existing know-your-customer (KYC) requirements. 

Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 (PMLA) is vital in India’s efforts to combat money laundering and terrorist financing. This legislation imposes obligations on financial institutions, banking companies, and intermediaries to maintain comprehensive transaction records and carry out thorough due diligence measures to prevent money laundering.

To further strengthen the framework for client due diligence and record-keeping Government of India introduced the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023. These amendment rules aim to enhance the existing regulations and ensure more effective measures against money laundering activities.

Key highlights of the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

The key highlights of the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, include:

  • Introduction of stringent customer due diligence measures
  • Implementation of a risk-based approach for identifying and assessing money laundering risks
  • Strengthening of monitoring and reporting mechanisms for suspicious transactions
  • Expansion of the definition of politically exposed persons (PEPs)
  • Enhanced cooperation and information sharing among reporting entities and regulatory authorities
  • Introduction of technology-driven solutions for effective anti-money laundering measures
  • Provision for penalties and enforcement actions for non-compliance with the rules
  • Focus on training and capacity building of personnel involved in anti-money laundering efforts

Group Definition and its Inclusion:

The Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, has introduced a new definition of “Group,” which refers to a collection of entities that are part of a multinational enterprise group or a group responsible for preparing consolidated financial statements under any applicable law or regulation.

This definition aligns with Section 286(9)(e) of the Income Tax Act, 1961, and its incorporation aims to clarify the entities recognized as part of a group for anti-money laundering objectives.

Consolidated Financial Statements Requirement:

Regarding the necessity of consolidated financial statements, it is essential to acknowledge that the previous edition of the Prevention of Money Laundering Act, 2002 (PMLA) already mandated parent entities to prepare consolidated financial statements if any of their subsidiary organizations had equity shares listed on a stock exchange in the relevant country or territory where the parent organization is located. The recent amendment does not alter this obligation. 

Importance of Compliance:

  • Parent entities need to understand and fulfill their obligations under the PMLA and other applicable laws and regulations related to financial reporting.
  • Compliance with these regulations serves multiple purposes, including promoting transparency and accountability in financial reporting practices.
  • It also contributes significantly to the collective efforts to prevent money laundering and terrorist financing.
  • By adhering to these regulations, parent entities play a crucial role in maintaining the financial system’s integrity and preventing illicit activities related to money laundering.

Revised Definition of Politically Exposed Persons (PEPs)

Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, has introduced a revised definition of “PEPs” or politically exposed persons. The revised definition clarifies individuals who qualify as PEPs, including foreign PEPs.

PEPs hold significant public positions or have close associations with such individuals. PEPs are categorized as high-risk clients due to their vulnerability to corruption or bribery.

Importance of Identifying and Monitoring PEPs:

Identifying and monitoring PEPs is a crucial aspect of the overall Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) framework. The revised provisions empower reporting entities to evaluate the risks linked to politically exposed persons (PEPs) and adopt appropriate measures to prevent money laundering and terrorist financing.

Practical Measures for Identifying and Monitoring PEPs:

  • Risk Assessment:
    • Reporting entities must conduct a risk assessment to determine the risk associated with a customer. PEPs should be considered high-risk customers and subject to additional scrutiny.
  • Enhanced Due Diligence (EDD):
    • Reporting entities should apply enhanced due diligence measures for PEPs.
    • As part of this process, we gather additional information about the customer, such as their source of funds, the nature of their business relationship, and the reason for the transaction.
  • Screening:
    • Reporting entities should screen their customers against a PEP list.
    • PEP lists can be obtained from regulatory authorities or other reliable sources.
    • Any matches found should be further investigated.
  • Ongoing Monitoring:
    • Reporting entities should continuously monitor the transactions and activities of PEPs.
    • This includes reviewing the customer’s account activity, transactions, and the source of funds.
  • Training:
    • For reporting entities to understand PEPs and their risks better, they should provide regular training to their staff.
    • Training should cover identifying PEPs, conducting enhanced due diligence, and monitoring PEP-related transactions.

By implementing these practical measures, reporting entities can effectively identify and monitor PEPs, thereby mitigating the risks of money laundering and terrorist financing. Such measures contribute to the overall integrity and security of the financial system.

Client Due Diligence (CDD)

Extension of Documentation Requirements:

The Amendment Rules have expanded the documentation requirements for client due diligence (CDD) beyond essential Know Your Customer (KYC) procedures.

  • In addition to registration certificates and PAN copies, clients must provide more detailed information depending on their legal form of organization.
  • This includes disclosing the names of individuals holding senior management positions, partners, beneficiaries, trustees, settlers, and authors.
  • Financial institutions, banking companies, or intermediaries also require details on their clients’ registered office addresses and principal places of business.

Establishing Written Policies and Procedures:

Developing and implementing written policies and procedures is advisable to conduct effective client due diligence.

  • These policies and procedures should outline the types of information and documentation required from clients, the process for verifying customer identities, and the frequency of updates.
  • Assigning responsibility for CDD to a specific team or individual within the firm is crucial.
  • This ensures that CDD is carried out consistently and follows the firm’s established policies and procedures.

Benefits of Implementing Effective CDD Measures:

  • Money laundering and terrorist financing risks can be mitigated through effective client due diligence measures.
  • Gathering comprehensive information about clients, financial institutions, banking companies, and intermediaries can assess the potential risks associated with a client and take appropriate measures to prevent illicit activities.
  • CDD also helps establish the integrity and credibility of the client base, contributing to a more secure and transparent financial system.

By extending the documentation requirements for CDD and implementing robust policies and procedures, organizations can enhance their ability to identify and manage the risks posed by their clients. These measures demonstrate a commitment to regulatory compliance and contribute to the effectiveness of anti-money laundering and counter-terrorism financing efforts.

Beneficial Ownership

In alignment with existing provisions of The Income-Tax Act, 1961, and The Companies Act, the amended rules have revised the threshold for identifying beneficial owners by reporting entities. Previously, beneficial owners were defined as individuals with ownership of or rights to more than 25 percent of a company’s shares, capital, or profits.

The threshold has now been lowered to 10 percent, expanding the scope to include more indirect stakeholders. Reporting entities, including banks, financial institutions, real estate businesses, and jewelry industries, must collect data on clients’ beneficial owners with a 10 percent ownership stake.

DARPAN Portal and KYC Digitization

The DARPAN  portal significantly digitizes the Know Your Customer (KYC) process for reporting entities. With the amended rules, reporting entities must upload their customers’ KYC data and related documents on the Darpan portal within three days of establishing a business relationship or conducting a transaction. This shift towards digital KYC data exchange aims to streamline processes and enhance the effectiveness of anti-money laundering and counter-terrorism financing measures.

Benefits of the DARPAN Portal:

  • Secure and Efficient KYC Data Exchange: The Darpan portal enables reporting entities to securely and efficiently exchange KYC data with the Department of Posts. By uploading customer information and documents on the portal, reporting entities can ensure a seamless data flow while complying with regulatory requirements.
  • Streamlining the KYC Process: Using the Darpan portal reduces the paperwork burden associated with manual KYC processes. Reporting entities can conveniently register customers, upload their KYC data, and maintain comprehensive records on a digital platform.
  • This streamlining improves operational efficiency and enables faster processing of KYC requirements.
  • Consent-based Sharing of KYC Data: The amended provisions allow reporting entities to share KYC data with customer consent, ensuring compliance with data protection laws.

By securely sharing this information, reporting entities can enhance their customer risk assessment and conduct enhanced due diligence measures when necessary.

Illustration of Darpan Portal Usage:

  • A non-profit organization receiving a substantial donation must perform due diligence on the donor and maintain detailed transaction records.
  • The organization can use the Darpan portal to register the donor electronically, storing essential details.
  • This digitized process ensures compliance with regulatory obligations while reducing administrative burden.

Enhanced Due Diligence on Politically Exposed Persons (PEPs):

  • The Darpan portal is valuable for identifying PEPs and conducting enhanced due diligence.
  • Non-profit organizations can leverage the portal to verify if a donor is a PEP and take necessary measures to mitigate the risks of money laundering and terrorist financing.
  • The portal’s functionalities enable reporting entities to fulfill regulatory obligations while minimizing the potential for non-compliance with financial regulations.
  • The utilization of the Darpan portal revolutionizes the KYC process, enabling reporting entities to efficiently manage customer data, comply with regulations, and prevent money laundering and terrorist financing. The platform enhances transparency, strengthens due diligence efforts, and contributes to a more secure financial ecosystem.

Non-Profit Organizations

It now encompasses entities formed for religious or charitable purposes as defined in Section 2(15) of the Income-tax Act, 1961, entities registered as trusts or societies under the Societies Registration Act, 1860, or similar state laws, and companies registered according to Section 8 of the Companies Act, 2013. Non-profit organizations must now register their information on the NITI Aayog’s DARPAN portal.

Cryptocurrency and Virtual Digital Assets (VDAs)

Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, have also brought cryptocurrency and VDAs under the purview of anti-money laundering laws. Entities dealing in VDAs are now considered reporting entities under the Prevention of Money Laundering Act (PMLA). Crypto exchanges, wallets, and other service providers in the crypto ecosystem must establish and implement AML measures and systems. These measures include conducting KYC checks, retaining customer data, monitoring and reporting suspicious transactions, and having policies to track VDA-related financial services.

The covered transactions related to cryptocurrency and VDAs under the PMLA now include the following:

  • Under the PMLA, the transactions involving cryptocurrency and Virtual Digital Assets (VDAs) that are subject to regulation now encompass the following activities:
  • Converting virtual digital assets into fiat currencies and vice versa.
  • Exchanging one or more types of virtual digital assets.
  • Transferring virtual digital assets.
  • Safely storing or managing virtual digital assets.
  • Offering financial services connected to the issuer’s sale of virtual digital assets.

Compliance Requirements for Digital Asset Service Providers:

Appointing Principal Officer and Designated Director:

  • Digital asset service providers must appoint a principal officer and designate a director to oversee overall compliance.
  • The details of the designated director and principal officer, including their name and address, must be communicated to the Financial Intelligence Unit – India (FIU-IND).
  • Reporting Cross-Border Wire Transfers and Suspicious Transactions:
  • The principal officer is responsible for monthly information on all cross-border wire transfers exceeding INR 5,00,000 or its equivalent in foreign currency to the FIU-IND.
  • Suspicious transactions, including deposits, withdrawals, money transfers, loans, investments, and collection services, must be promptly reported to the FIU-IND within seven working days.

These amendments highlight the commitment of the Indian government to combat money laundering and terrorist financing. Extending regulations to digital asset service providers and implementing a digitized KYC process aims to enhance transparency, reduce financial crimes, and safeguard the financial system’s integrity.

Reasons for the  Introduction of Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

Strengthening Anti-Money Laundering Efforts:

  • Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, more clarity to definitions and documentation requirements, enabling better identification of high-risk clients involved in money laundering.
  • Financial institutions can strengthen their capacity to prevent money laundering and terrorist financing by acquiring comprehensive information during due diligence.

Modernizing the KYC Process:

  • The implementation of the DARPAN portal facilitates the digitization of the KYC process.
  • It streamlines data exchange between reporting entities and the Department of Posts, reducing paperwork and improving efficiency.
  • Digitalizing KYC data empowers reporting entities to conduct informed risk assessments and implement suitable measures to deter financial crimes.

Inclusion of Digital Asset Service Providers:

  • The amendment classifies digital asset service providers as Reporting Entities, subjecting them to anti-money laundering and counter-terrorist financing measures.
  • This recognition ensures that crypto and other digital asset service providers comply with the same regulations as traditional financial institutions, enhancing the integrity of the digital asset ecosystem.

The official notification about the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, is attached below for reference:

Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023