Obligations of Banking Companies, Financial Institutions and Intermediaries

 

Under Section 12 of the Prevention of Money Laundering Act, 2002 (PMLA) for anti-money laundering actions (AML), all REPORTING ENTITIES* are required to-

 

a) maintain a record of all transactions, including information relating to transactions covered under clause (b), 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)  verify the identity of its CLIENTS in such manner and subject to such conditions, as may be prescribed;

·     Under Section 2(ha) of the PMLA, "CLIENT" has been defined to mean a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.

d)     identify the BENEFICIAL OWNER, if any, of such of its clients, as may be prescribed;

·    Under Section 2(fa) of the PMLA, "BENEFICIAL OWNER" has been defined to mean an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person. 

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

for a minimum period of 5 (five) years (Ref.: Section 12(3) PMLA).

 

However, under Section 12(2) of PMLA it is mandated that every information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential.

 

The records referred to in clause (e) of Section 12 of sub-section (1) shall be maintained for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.

 

Under Section 2(wa) of the PMLA "*reporting entity" has been defined to mean and include:

 

o   A BANKING COMPANY,

§  Sec. 2 (e) defines "BANKING COMPANY" as to mean a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

 

o   A FINANCIAL INSTITUTION,

§ Sec. 2(l) of PMLA defines "FINANCIAL INSTITUTION" as to mean a financial institution as defined in clause (c) of section 45-I of the Reserve Bank of India Act, 1934(2 of 1934) and includes

 

·       a chit fund company,

o   "CHIT FUND COMPANY" means a company managing, conducting or supervising, as foreman, agent or in any other capacity, chits as defined in section 2 of the Chit Funds Act, 1982 (40 of 1982). (Ref. Sec. 2(h) of PMLA)

 

·       a housing finance institution,

o   "HOUSING FINANCE INSTITUTION" shall have the meaning as assigned to it in clause (d) of section 2 of the National Housing Bank Act, 1987 (53 of 1987). ( Ref.: Sec. 2(m) of PMLA)

 

·       an authorized person,

o   AUTHORISED PERSON" means an authorised person as defined in clause (c) of section 2 of the Foreign Exchange Management Act, 1999(42 of 1999). (Ref.: Sec. 2[(da) of the PMLA)

 

·       a payment system operator,

 

o   Under Sec. 2(rc) of the PMLA, "PAYMENT SYSTEM OPERATOR" means a person who operates a payment system and such person includes his OVERSEAS PRINCIPAL.

 

§The term "OVERSEAS PRINCIPAL" means,-

 

·    in the case of a person, being an individual, such individual residing outside India, who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India;

·    in the case of a HUF, Karta of such Hindu undivided family residing outside India who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India;

·      in the case of a company, a firm, an association of persons, a body of individuals, an artificial juridical person, whether incorporated or not, such company, firm, association of persons, body of individuals, artificial juridical person incorporated or registered outside India or existing as such and which owns or controls or manages, directly or indirectly, the activities or functions of payment system in India;

 

·       a non-banking financial company

o   Sec. 2(q) of the PMLA defines "NON-BANKING FINANCIAL COMPANY" having the same meaning as assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934)

 

·       the Department of Posts in the Government of India.

 

·                    o   AN INTERMEDIARY,

 

         o   Under Sec. 2(n) of PMLA defines "intermediary" as to mean,

 

§  a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992(15 of 1992); or

 

§  an association recognised or registered under the Forward Contracts (Regulation) Act, 1952(74 of 1952) or any member of such association; or

 

§  intermediary registered by the Pension Fund Regulatory and Development Authority; or

 

§  a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956);]

 

·                 o   A PERSON carrying on a designated business or profession.

 

o   The term “PERSON” has been defined under Sec. 2(s) to mean and include--

 

§  an individual,

§  a Hindu undivided family,

§  a company,

§  a firm,

§  an association of persons or a body of individuals, whether incorporated or not,

§  every artificial juridical person not falling within any of the preceding sub-clauses, and

§  any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses.

 

It is pertinent to note that under Section 13 of the PMLA, If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, without prejudice to any other action that may be taken under any other provisions of this Act, he may--

(a)   issue a warning in writing; or

 

(b)  direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or

 

(c)   direct such reporting entity or its designated director on the Board or any of its employees, to send reports at such interval as may be prescribed on the measures it is taking; or

 

(d)  by an order, impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.

 

Under Section 14 of the PMLA, subject to the exceptions provided under Sec. 13 of the PMLA, the reporting entity, its directors and employees shall not be liable to any civil or criminal proceedings against them for furnishing information under clause (b) of sub-section (1) of section 12.

 

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Law of Money Laundering in India by Vijay Pal Dalmia, Advocate 09810081079  (Click Here to see)

 

Black Money - Foreign Bank Accounts & Criminal Prosecutions under the (Indian) Income Tax Act

 

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