Non-profit organisations (NPOs) will now face intense scrutiny under the Prevention of Money Laundering Act (PMLA) as the Finance Ministry has now brought two key changes in rules related to maintenance of records under PMLA.

The Ministry has also given definition for Politically Exposed Person (PEP) besides other changes. These notifications will take effect from March 7.

Though experts are expecting more changes in the definition of PEP, they also feel that changes related with NPOs will make the process onerous even if they indicate an intent in transparency in the use of funds.

New Rules

The notification defines NPO as “any entity or organisation, constituted for religious or charitable purposes” referred in the Income Tax Act, Societies Registration Act or Companies Act. Earlier, any entity or organisation that is registered as a trust or a society under the Societies Registration Act, or any similar State legislation, or a company registered under Companies Act was referred to as an NPO.

A new sub-rule has been added which states that every banking company/financial institution/ intermediary shall register the details of a client, in case of client being an NPO, on the DARPAN Portal of NITI Aayog, if not already registered. They also have to 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.

Said Dinesh Pednekar, Partner with Economic Laws Practice, “This will certainly bring in more transparency with respect to the functioning of the NPO, particularly the origin/use of funds and to achieve the objectives of the Act.” Sawant Singh, Co-founding Partner, Phoenix Legal felt that disclosures by banks, FIs and intermediaries have been made more onerous with the view of bringing down the significant risk of money laundering or tax evasion and improving due diligence in handling such transactions.

PEPs defined

The notification has also given a definition for PEPs — 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.

Explaining the concept, Pednekar felt PEPs, through his/her prominent position or influence, is more susceptible to being involved in bribery or corruption. The newly included definition of PEP under PMLA’s amendment of 2023 is in line with the definition provided by the Reserve Bank of India (RBI) and SEBI.

However, he said, “a notable difference in the definition of PEP under the PMLA’s Amendment of 2023 is that this definition does not include domestic PEPs. A similar definition in the Act should be included in the principal Act of 2002.” Further, as India is a part of the Financial Action Task Force (FATF), PEP as defined under the FATF recommendation covers both foreign PEPs as well as domestic PEPs.

On overall notification, Singh said with clean governance taking centre stage in India‘s desire to woo investors to its Make in India initiatives, the PMLA too has been amended. “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,” he said.

comment COMMENT NOW