Changes in PMLA: What, Why, and the Concerns They Raise

Why in News?

• In recent months the government has brought a few changes to money laundering law; Prevention of Money Laundering Act (PMLA).
• These changes will incorporate more disclosures for non-governmental organisations and plug loopholes ahead of India’s proposed assessment later this year under the Financial Action Task Force (FATF); the global money laundering and terrorist financing watchdog.

 

Prevention of Money Laundering Act (PMLA)

• The Act was formulated for the following objectives
  • Prevent money-laundering.
  • Combat/prevent channelising of money into illegal activities and economic crimes.
  • Provide for the confiscation of property derived from, or involved/used in, money laundering.
  • Provide for matters connected and incidental to the acts of money laundering.

• The Enforcement Directorate (ED)in the Department of Revenue, Ministry of Finance, is responsible for investigating the offences of money laundering under the PMLA.
• Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue is the central national agency responsible for receiving, processing, analysing, and disseminating information relating to suspect financial transactions.
• The Act was first enacted in 2002 and was amended in 2005, 2009, 2012, etc.

 

Recent Amendments to the PMLA

• Inclusion of new entities into the ambit of PMLA
  • Practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients are now included in the amended law.
• Financial transactions that will get covered under the PMLA:
  • Buying and selling of any immovable property;
  • Managing client money,
  • Securities or other assets;
  • Management of bank,
  • Savings or securities accounts;
  • Organisation of contributions for the creation,
  • Operation or management of companies;
  • Creation, Operation, or management of companies,
  • Limited liability partnerships or trusts,
  • And buying and selling of business entities.
• The amended law will allow 22 financial entities including Amazon Pay (India) Pvt. Ltd, Aditya Birla Housing Finance Ltd and IIFL Finance Ltd to verify the identity of their customers via Aadhaar.
• To provide the clarity on Definition of PEPs (Politically exposed Persons) Individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, military officers, etc”.
  • The amendment was about foreign PEPs and not domestic ones.

 

Exclusion of Lawyers and Legal professionals

• Changes have been made applicable only for transactions where they undertake financial transactions on behalf of their clients.
• Regular functions like certification of accounts, and financial advice among others for a fee are not covered under this change in PMLA.

 

The Reason Behind the Amendments

• These amendments hold significance ahead of the proposed assessment of India under the FATF later this year.
  • Due to the pandemic and the pause in the FATF’s assessment process, the fourth round of mutual evaluation of India had been postponed to 2023.
  • Before this, the FATF had undertaken an evaluation for India in June 2010.
  • The FATF has 40 recommendations related to anti-money laundering/counter-terrorist financing (AML/CFT) which the member countries must comply.
• To plug loopholes and ensure Compliance with FATF.
  • For instance, define PEPs under PMLA to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/AML standards for banks and financial institutions.

 

Concerns of stakeholders

• Fear of imposition of heavy penalty in case of Non-compliance
  • The reporting entities shall be expected to maintain the record of all transactions and would be required to furnish these to the Director (FIU).
  • The reporting entities would also be expected to conduct KYC before the commencement of each specified transaction and will have to examine the ownership and financial position including sources of funds of the client and to record the purpose behind conducting the specified transaction.
  • Failure to meet these requirements could invite imposition of penalty by the Director, FIU and even more action by other investigative agencies such as ED.
• Compliance process will become a punishment
  • Besides penalty for non-compliance stakeholders could also have potential run-ins with investigative agencies.
  • The PMLA Act is very stringent and compliance is a difficult task.
  • The conviction rate in PMLA is very low but the entire process is extremely difficult to go through.
• No need for new measures: These newly incorporated professionals are already regulated by professional bodies setup under various acts of Parliament and such measures, therefore, are not necessary.

 

Conclusion

• While the amendments are expected to aid investigative agencies further in their probe against dubious transactions involving shell companies and money laundering there are certain concerns regarding the process of implementation.
• Therefore, Implementation becomes the key factor.

 

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Source: The Indian Express