Anti Money Laundering Anti terrorism financing Policy
Prevention of Money Laundering Act, 2002 was enacted by the Indian parliament in 2002 and came into force in 2005. It was enacted following the adoption of the Political Declaration and Global Programme of Action by the United National General Assembly in February 1990, which called upon member states to develop money laundering legislations and programmes. The PML Act not only criminalises the offence of money laundering but also puts in place preventive measures. These measures are proposed to be achieved through provisional attachment of ‘proceeds of crime’, which are likely to be concealed, transferred or dealt with in a manner that may obstruct proceedings, and through obligations imposed on banks, financial institutions and intermediaries to maintain records and supply information regarding certain types of transactions.
The PML Act provides for the appointment of authorities to administer and enforce the provisions of the PML Act. These authorities are vested with powers, similar to those vested in a civil court, to provisionally attach property involved in money laundering, issue summons and search, seize and arrest with regard to proceeds of crime. Under the PML Act, financial institutions and intermediaries, reference to which includes, inter alia, non-banking financial companies (NBFCs), stockbrokers and payment system operators, are required to maintain records of transactions of a prescribed nature and above certain thresholds. The procedure and manner for providing such information is prescribed by the RBI in consultation with the central government.
Although there is limited jurisprudence on the interpretation of provisions of the PML Act, as a general principle of law in India, courts have widely accepted the position that criminal statutes must be construed strictly, and that for a penalty to be imposed under any criminal statute, an offence must have been committed that falls not only within the letter but also within the spirit of the statute (see Glaxo Industries v Presiding Officer, Labour Court, Meerut AIR 1984 SC 505). Having said that, the courts in India have also held that where a plain reading of the statute does not cover the objectives of the legislature in passing the law, the courts must also have due consideration for those objectives while interpreting the provisions of the statute. The above principle is especially important in the context of socio-economic statutes, such as those dealing with corruption or violations of foreign exchange laws. Thus, one may view that the PML Act, if litigated before Indian courts, may also be interpreted and enforced in line with the above principles.
The PML Rules
The PML Rules have been issued by the central government in consultation with the RBI, setting out the process to be adopted by banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries (collectively, reporting entities) for identifying and verifying their clients before commencing a business relationship with them. The PML Rules also prescribe exhaustive requirements for reporting entities to establish and verify the identity of any client at the time of operating an account or executing a transaction, including prescribing the documents that the reporting entity should seek from a client and maintain on record.
The definitions of the terms ‘financial institutions’, ‘designated persons’ and ‘intermediaries’ are extremely wide under the PML Act. The PML Rules cast obligations on reporting entities to maintain records of certain prescribed transactions, which include all transactions in excess of a certain value, series of interconnected transactions that may cumulatively amount to a prescribed value and suspicious transactions (as defined in the PML Rules), regardless of whether the transactions are effected in cash. The PML Rules stipulate that reporting entities should follow the procedures and manner of maintenance of records prescribed by their respective regulators. In this regard, the RBI has issued the RBI KYC Master Directions for banks and financial institutions, and the SEBI has issued the SEBI AML Guidelines for SEBI-registered intermediaries.
Offence of money laundering
Money laundering is defined in the PML Act as direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or having actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such property as untainted property. Under section 3 of the PML Act, the following actions are tantamount to the offence of money laundering:
a direct or indirect attempt to indulge in any process or activity that is connected with the proceeds of crime (including its concealment, possession, acquisition or use), with the intention of projecting or claiming those proceeds of crime as untainted property;
any direct or indirect assistance in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property, provided that assistance is knowingly given; and
being, directly or indirectly, a knowing party to or being involved in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property.
The PML Act sets out certain specific offences that are referred to as ‘scheduled offences’ under the PML Act. These scheduled offences are further sub-divided into three categories, namely Part A, Part B and Part C offences. The commission of any offence mentioned in Part A of the Schedule to the PML Act (Part A offence) or Part C of the Schedule to the PML Act (Part C offence) constitutes a scheduled offence. Part C offences are those that have cross-border implications and are Part A offences, offences against property under Chapter XVII of the Penal Code 1860 (PC) or offences of wilful attempts to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 (the Black Money Act). The commission of an offence mentioned in Part B of the Schedule to the PMLA (Part B offence) constitutes a scheduled offence only if the total value involved in the offence is equal to or greater than 10 million rupees.
To constitute an offence of money laundering under section 3 of the PML Act, a person must knowingly assist or knowingly be a party to any process or activity connected with the proceeds of crime and in the projection or claiming of such proceeds of crime as untainted property, or be involved in concealing, acquiring or using such proceeds of crime. Therefore, the element of knowledge is an important constituent for the offence of money laundering in India; thus, a strict liability standard may not be applicable in India in the context of an offence of money laundering. The term ‘knowledge’ was specifically inserted into section 3 of the PML Act after deliberations over the draft bill in parliament prior to the passing of the PML Act. Therefore, the legislative intent of the parliament in this regard seems quite clear.
Banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries (collectively, reporting entities) can be prosecuted or pursued for money laundering offences committed by their clients if it can be demonstrated that they were aware of the commission of a scheduled offence, knowingly became recipients of the proceeds of crime and projected the proceeds as untainted property. The obligations cast on the reporting entities in terms of the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016 (the RBI KYC Master Directions) and the Master Circular on Guidelines on Anti-Money Laundering (AML) Standards/Combating Financing of Terrorism (CFT)/Obligations of Intermediaries under the Prevention of Money Laundering Act 2002 and the rules framed thereunder (the SEBI AML Guidelines) are to exercise due diligence in their dealings with clients and to maintain and supply records of certain prescribed dealings with clients. Accordingly, although the exercise of diligence on the part of the reporting entities does not constitute a defence under the PML Act and the PML Rules, it may be used as a factor in demonstrating the lack of knowledge of the commission of money laundering by their clients.
Pursuant to the PML Rules, every reporting entity is required to maintain a record of all transactions, including a record of:
all cash transactions where the value is more than 1 million rupees or its equivalent in foreign currency;
all series of cash transactions that are integrally connected to each other and that have been valued below 1 million rupees or its equivalent in foreign currency, where the series of transactions have taken place within a month and the aggregate value of the transactions exceeds 1 million rupees or its equivalent in foreign currency;
all transactions involving receipts by NPOs of a value of over 1 million rupees or its equivalent in foreign currency;
all cash transactions where counterfeit currency notes or bank notes have been used as genuine currency or where any forgery of a valuable security or a document has taken place facilitating the transactions; and
all ‘suspicious transactions’; in other words, transactions, including attempted transactions, regardless of whether these are made in cash, that to a person acting in good faith:
gives rise to reasonable grounds of suspicion that it may involve proceeds of a scheduled offence, regardless of the value involved;
appears to be made in circumstances of unusual or unjustified complexity;
appears to have no economic rationale or bona fide purpose; or
gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism, regardless of whether it is in cash, made by way of:
deposits and credits, withdrawals into or from any accounts by way of cheques, travellers cheques or transfers from one account to another within the same reporting entity and any other mode in whatever name it is referred to;
credits or debits into or from any non-monetary accounts, such as demat accounts or security accounts, in any currency, maintained with the reporting entity;
money transfers or remittances in favour of clients or non-clients from India or abroad and to third-party beneficiaries in India or abroad, including transactions on its own account in any currency by any mode of money transfer;
loans and advances including credit or loan substitutes, investments and contingent liability by way of subscription to debt instruments such as: commercial papers, certificates of deposit, preferential shares, debentures, securitised participation, interbank participation or any other investments in securities; purchase and negotiation of bills, cheques and other instruments; foreign exchange contracts, currency, interest rate and commodity and any other derivatives; or letters of credit, standby letters of credit, guarantees, comfort letters, solvency certificates or any other instrument for settlement or credit support;
collection services in any currency by way of the collection of bills, cheques, instruments or any other mode of collection;
all cross-border wire transfers of the value of more than 500,000 rupees or its equivalent in foreign currency where either the origin or destination of the funds is in India; or
all purchases and sales by any person of immovable property valued at 5 million rupees or more that is registered by the reporting entity, as the case may be.
For the purpose of reporting suspicious transactions, apart from ‘transactions integrally connected’, ‘transactions remotely connected or related’ must also be considered.
The records required to be maintained with respect to a transaction must contain all the necessary information specified by the regulator of the regulated entity to permit reconstruction of individual transactions, including the following information:
the nature of the transaction;
the amount of the transaction and the currency in which it was denominated;
the date on which the transaction was conducted; and
the parties to the transaction.
The records are required to be maintained using the procedure and in the manner specified by the PML Rules. Every reporting entity must maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for prosecution of criminal behaviour. Should there be any suspected drug-related or other laundered money or terrorist property, the competent investigating authorities may need to go through the audit trail to reconstruct a financial profile of the suspect account. To enable this reconstruction, registered intermediaries should retain the following information for the accounts of their clients in order to maintain a satisfactory audit trail:
the beneficial owner of the account;
the volume of the funds flowing through the account; and
for selected transactions:
the origin of the funds;
the form in which the funds were offered or withdrawn (eg, cheques and demand drafts);
the identity of the person undertaking the transaction;
the destination of the funds; and
the form of instruction and authority.
Every reporting entity must ensure that all client and transaction records and information are made available on a timely basis to the competent investigating authorities. Where required by the investigating authority, they should retain certain records, such as client identification, account files and business correspondence for periods that may exceed those typically required under the relevant legislation, rules and regulations, including the Banking Regulation Act 1949, the RBI Act, the SEBI Act, the rules and regulations framed under each of these and the PML Act.
The principal officer is under an obligation to supply information relating to suspicious transactions to the office of the director of the FIU no later than seven working days on being satisfied that the transaction is suspicious. Reporting entities should not put any restrictions on operations on the accounts where a suspicious transaction report has been made.
The principal officer must supply information in respect of cash transaction (individual or connected) of a value of more than 1 million rupees, receipts by NPOs of more than 1 million rupees, counterfeit currency transactions and cross-border wire transfers of a value of more than 500,000 rupees every month to the office of the director of the FIU by the 15th day of the following month. Further, the principal officer must supply information relating to transactions in immovable property valued at more than 5 million rupees every quarter to the office of the director of FIU by the 15th day of the month following the quarter (ie, April, July, October or January).
Pursuant to the RBI KYC Master Directions and the SEBI AML Guidelines, the background, including all documents, office records, memoranda and clarifications, sought pertaining to transactions that are deviant from the client’s normal activity and purpose thereof must also be examined, and findings should be recorded in writing. Further, those findings, records and related documents should be made available to auditors as well as to the RBI, the SEBI, the FIU and other relevant authorities during audit, inspection or as and when required. These records must be preserved for a period of at least five years.
In addition to the above, pursuant to an amendment to the PML Rules, linking of a client’s Aadhaar number to bank accounts was made mandatory for Indian-resident individuals, and existing bank account holders had to furnish the Aadhaar number issued by the UIDAI by 31 March 2018, failing which the accounts were to cease to be operational. However, this requirement has been discarded, and the requirement to link Aadhaar numbers to bank accounts is now voluntary.
Reporting of suspicious transactions
Any suspicious transaction (in the form of a detailed report that includes details of clients, transactions and the nature or reason of suspicion) must immediately be notified to the designated officer within the reporting entity. The principal officer and other related staff members are required to have timely access to client identification data and CDD information, transaction records and other relevant information.
To ensure that the registered intermediaries properly discharge their legal obligations to report suspicious transactions to the authorities, the principal officer acts as a central reference point in facilitating the reporting of suspicious transactions and for playing an active role in the identification and assessment of potentially suspicious transactions, and has access to and is able to report to senior management at the next reporting level or the board of directors.