In News
- 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.
- It has also 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).
- The expanded definitions also included cryptocurrencies under provisions to monitor illicit financial flows.
About
- The government has been struggling in recent years to formulate an appropriate regulatory response to deal with the pandemic-era upsurge in advertisements soliciting investment in virtual assets as well as reports of actual investment.
- A July 2021 online report had estimated India as being the country with the highest number of ‘crypto owners’, which was more than threefold the number of owners of crypto assets in the second-ranked U.S.
Amendments in the PMLA Rules
- 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 move will bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms.
- The ED is the main agency probing allegations under PMLA.
- The amended rules also have 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’ are those with the entitlement of more than 25% of shares or capital or profit of the company, which has now been reduced to 10%.
- 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.
- 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 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.
- Virtual digital assets (VDA) trade has been brought under PMLA. As of now, cryptocurrencies are unregulated in India, though the government has taxed their withdrawals into rupees.
- New rules mandate crypto exchanges and intermediaries dealing in virtual assets to maintain the KYCs of their clients and report suspicious transactions to financial intelligence units.
- The new rules will make the legal position clearer for both the investigating agency as well as people indulging in fraud via such modes of digital currency.
- It will prevent the misuse of crypto, and NFTs through money laundering and other illegal activities.
Significance of the FATF-related changes
- The amendments assume significance ahead of India’s proposed FATF assessment, which is expected to be undertaken later this year.
- The broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment.
- In its recommendations, the FATF states that financial institutions should be required to have appropriate risk-management systems to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation.
Concerns
- 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 authorities 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.
Conclusion
- The decision to mandatorily bring all trade in virtual digital assets under the PMLA now lays the onus of ascertaining the provenance of all activity, including safekeeping, in such assets upon individuals and businesses participating in or facilitating these transactions.
Source: TH
