What is the scope of the Prevention of Money Laundering Act (PMLA)? 

The scope of the Prevention of Money Laundering Act 2002 can be seen in the original bill introduced in 1998. Based on the recommendations of the Financial Action Task Force (FATF), it tried to create a comprehensive legislation to combat money laundering. As many as 40 recommendations of the task force were classified under various heads such as: 

  • Deeming money laundering through serious crimes a criminal offence; 
  • Determining the modalities of disclosure by financial institutions on reportable transactions;
  • Confiscation of the proceeds of crime; 
  • Making money laundering an extraditable offence; and
  • Promoting international co-operation in the investigation of money laundering 

The current law aims to fulfil these objectives, besides enabling the framing of subordinate legislations in line with evolving situations. 

What was changed in the PMLA recently? 

On March 7, the Finance Ministry issued two notifications.

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‘To plug loopholes and to provide more transparency one sees reduction of threshold of controlling ownership interest and identification of beneficial owner where the client is a trust’

Non-Profit Organisations under PMLA now includes entities involved in religious/charitable activities

The first notification was related to virtual digital assets (VDA), popularly known as crypto assets, bringing five types of activities under PMLA:  

  • exchange between VDA and fiat currencies; 
  • exchange between one or more forms of VDA; 
  • transfer of VDA; 
  • safekeeping or administration of VDA or instruments enabling control over them; and 
  • participation in, and provision of financial services related to an issuer’s offer and sale of a VDA. 

The second notification was related to changes in the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, which include: 

  • defining a politically exposed person, or PEP;
  • amending the definition of a non-profit organisation;
  • amending the definition of group entities and prescribing their obligations; and
  • amending the threshold for determining beneficial ownership.   

How will the tweaks impact crypto exchanges? 

According to the notification,  if activities related to exchange of VDAs are carried out for or on behalf of another person, it shall be regarded as an activity under PMLA. This brings crypto exchanges under PMLA.

The entities are required to verify the identity of clients and beneficial owners, and maintain records of transactions for five years from the date of transaction. They must maintain records of identity, files and correspondences of clients for five years from the end of the business relationship or closure of account, whichever is later 

How will the tweaks impact foreign portfolio investors? Why are they upset? 

FPIs will have to rework the mechanism for maintenance of records because of the change in threshold for determining beneficial ownership. Earlier, the beneficial owner of the client, if a company, had to be determined if he or she owned more than 25 per cent of shares or capital or profits of the company. This has been lowered to 10 per cent.

Similarly, in the case of a trust, the threshold will be 10 per cent as against 15 per cent previously. They must also furnish the incorporation documents along with the names and addresses of the key persons of companies, partnership firms and trusts along with basic details. 

Many FPIs are worried as they have to disclose the beneficial owners since the threshold has been lowered.

The notification says the changes will come into effect from the date of publication in the gazette, which is March 7, 2023. FPIs feel they have too little time to comply. They also want further clarifications. 

Who are PEPs? What is the significance of this definition under PMLA? 

The notification has defined ‘politically exposed persons’ (PEPs) as individuals entrusted with prominent public functions by a foreign country, including 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 newly included definition of PEP under the amended PMLA is in line with the definition provided by the Reserve Bank of India (RBI) on May 29, 2019 (Master Direction — Know Your Customer (KYC) Direction, 2016) and SEBI. However, a notable difference in the definition under PMLA is that it does not include domestic PEPs. A similar definition should necessarily be included in the principal Act of 2002. 

India is a part of the FATF, under which the definition of PEP covers both foreign and domestic PEPs. 

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