NBFC

Cross-Border Transactions and PMLA

Cross-border transactions mean the transfer of goods and services outside the country. These kinds of transactions take place between individuals, companies, and various banking sectors. PMLA, or Prevention of Money Laundering Act, is a provision to prevent money laundering activities and terrorist financing.

Meaning of Cross-border Transactions

A cross-border transaction is the transfer of funds by an individual or a company from one country to another country, which is inclusive of retail and wholesale transactions. Cross-border transactions require a heavy amount of fees, lengthy procedures, time, etc. There are several requirements that one must have to fulfil before transferring a fund, such as laws and regulations, tax, compliance, data protection, etc.

With the advancement of technology, digitalisation has brought the economy closer all across the globe, thus raising financial activities. Cross-border transactions to move funds from one country to another have increased rapidly in the last decades. Such cross-border transactions are connected to various illegal activities such as terrorist financing, tax evasion, money laundering, etc. In India, to fight against such illegal activities in cross-border transactions, a law named the Prevention of Money-laundering Act,2002(PMLA) was implemented to fight against money laundering activities connected to cross-border transactions.

Importance of Monitoring Cross-Border Transactions

When it comes to cross-border transactions, the risk with the financial organisations increases not only for a regulated industry but also for the economy across the globe. Thus, it is indeed important for businesses connected to cross-border transactions to prioritise the importance of PMLA compliances, to avoid heavy penalties and legal liabilities, and to detect and identify potential vulnerabilities before they go out of hand.

It is indeed very important for financial organisations to keep monitoring AML compliances to stay relevant in the market and safeguard the integrity and reputation of the respective organisations.

PMLA Compliance Under Cross-Border Transaction

To safeguard the reputation of the reporting financial institutions, certain AML compliances have to be fulfilled to stay relevant in the market and prevent money laundering activities across cross-border transactions. Given below are the important PMLA compliances to be followed by the financial institutions engaged in cross-border transactions:

• Customer due diligence Process or CDD

CDD is one of the critical components under PMLA compliances that are to be conducted by regulated entities or financial institutions to detect and identify the parties involved in cross-border transactions. This CDD involves identifying the customers and their beneficial owners and detecting the high-risk customer profiles that are more exposed to money laundering activities.

• KYC or know your customer

Knowing your customer as a part of the AML customer due diligence means a procedure to collect details and information regarding the customer and its beneficiary, such as name, contact details, address, identity cards, nationality, etc. Such information has to be evaluated and examined by professionals to maintain the authenticity of the customer’s profile.

• Screening

Parties involved in cross-border transactions have to go through a screening against the sanction list, such as UNSC sanctions lists, the Ministry of Home Affairs, and any other international sanction list. This screening is important to detect if the customer is a politically exposed person.

• Assessment of the Risk involved

A company, after collecting the information about the concerned organisations, shall perform the risk assessment to determine the potential high risk connected to the money laundering activities or terrorist financing that may occur during the cross-border transactions or any fund transfer across the globe or within the nation. A further risk assessment shall be conducted by the respective organisations if any additional risks are detected.

• Enhanced due Diligence or EDD

Enhanced due diligence or EDD has to be conducted when an organisation detects a further high risk upon the customer’s profile. Organisations shall grill more and go deep in understanding where and how the funds are going. Such enhanced due diligence needs a higher authority’s approval to proceed with the program.

Cross-Border Transactions Monitoring

An organisation or a customer engaged in a cross-border transaction must have a program for detecting suspicious activity by implementing ongoing transaction monitoring for constantly tracing the trends of the financial transactions so that any suspicious activity is instantly detected and precautions are taken to avoid further damage to the companies’ reputations.

Such cross-border transaction monitoring shall be designed in such a way as to detect red-flag irregularities such as:

1. Non-stop cross-border transactions without having any business motive.
2. Cross-border transactions to high-risk countries that are famously known for funding terrorist organisations or engaged in money laundering activities.
3. The huge volume of fund transfers outside its country contradicts his business profile.

Suspicious transactions reporting

Organisations detecting a suspicious transaction exposed to money laundering activities or terrorist financing shall report the same to the concerned authority, the FIU-IND, or the Financial Intelligence Unit of India, by filling a report on such suspicious cross-border transactions.

However, in India, any transactions that are more than 5 lakhs or equivalent in any foreign currency of cross border transactions have to file a cross-border wire transfer report (CBWTR) irrespective of whether red flags have been detected or not. Such cross-border transactions must be reported to the concerned authority if such transactions are originating from India or are destined for India. The report must contain the following information:

1. Transfer amount value.
2. Sender name, address, and unique identification details.
3. Beneficiary names, addresses, and unique identification details.
4. Sender and beneficiary name and relevant details of financial entities.
5. Intermediary bank and financial institution details that are dealing with the respective cross-border transactions.
6. Reason for reporting the cross-border transactions.

Thus, organisations engaging in cross-border financial transactions can prevent financial crimes or money laundering activities by complying with and implementing AML programs such as customer due diligence, transaction monitoring, etc.

What are the best practices for cross-border transactions

Now you know why AML laws and regulations have to be complied with while dealing with cross-border transactions to avoid penalties, legal liabilities, etc. Given below are the best practices for conducting cross-border transactions smoothly:

1. An organisation, with the help of a professional expert, shall evaluate how much risk is involved with the concerned business entities and their regulatory requirements. A comprehensive design of AML compliance and regulations framework has to be formed accordingly.
2. To reduce false positive alerts, an organisation has to adopt a monitoring system to detect such high-risk profiles.
3. With the advancement of technology, an organisation shall have updated tools to conduct such transaction monitoring efficiently so that such detection is generated promptly without any irregularities.
4. A regular training and awareness program on various AML compliance and regulations has to be conducted by the respective organisations so that employees and staff are well-equipped to deal with complex cross-border transactions.
5. The internal management team has to be documented very precisely in the AML policies and structure so that money laundering transactions are monitored and reported promptly, preventing legal liabilities, non-compliance, and penalties.

Cross Border Transactions of Cryptocurrencies

In India, if an Indian citizen uses cryptocurrencies to pay for foreign services and goods, it shall be considered an export of goods. Such cross-border transactions on cryptocurrencies are governed under the Foreign Exchange Management Regulations 2015, along with the Master directions on the export of goods and services. As per these regulations, such exports of cryptocurrencies shall be through an authorised bank along with all the important transactions. Any cross-border transactions of cryptocurrencies without the involvement of the authorised bank shall become invalid and non-compliance with such export laws and regulations.

How PMLA has contributed to Cross-border transactions

The prevention of money laundering serves a dual purpose, with one being preventive and the other being penal. PMLA, or prevention of money laundering, came into force in 2015 through the Directorate of Financial Intelligence Unit under the guidance of the Ministry of Finance. Part C of the PMLA schedule covers offenses related to cross-border transactions. This act covers the offences connected to tax evasion, penalties, and interest that have been referred to in the Black Money and Imposition of Tax Act of 2015. Cross-border transactions are transactions that are connected from one country to another. Such offences are committed in a foreign country, but the revenue earned is sent to India, or if the offence is committed in India but money is sent to other foreign countries. Reserve Bank of India, from time to time, publishes a circular on several duties that one must comply with when engaging in cross-border transactions in India.

Challenges in Cross-Border transactions

Cross-border transactions are indeed complex, and yet financial institutions commonly face several challenges, such as cost, payment processing, security, etc.

1. Payment Processing

Unlike any transactions within the nations, cross-border transactions are complex and require an ample amount of time since incomplete information or details may halt the transfer of the fund, non-compliance with the concerned laws and regulations, and other measures may result in delaying cross-border transactions.

2. Legal Issues

Different countries have different specific laws and regulations, and organisations engaged in cross-border transactions have to face this complex requirement if they want to expand their business in other countries. Such legal requirements have to be guided professionally so that various agreements and clauses are interpreted accordingly. For example, data protection laws or intellectual property laws differ from country to country.

3. Tax Issues

Just like legal requirements, organisations engaged in cross-border transactions have to meet tax requirements, which differ from country to country. Tax regulations define the impact of fairness and profitability of the businesses of the respective organisations. For example, some countries prevent a double taxation policy.

4. Data Protection

Indeed, data protection is a part of the legal requirement, but various countries, with the advancement of technology, have introduced data protection laws. A financial institution has to look into the details of data protection law very thoroughly so that the business cross-border transactions don’t go in vain. For example, in the US and Europe, a law on data protection GDPR is to be complied with by all the businesses that are operational in both the US and Europe. A company is not allowed to share the personal details of the customer with any financial institutions or banks.

5. Operational Systems

Different banks have different operational systems to deal with cross-border transactions. With the advancement in technology, the earlier operational system may become inefficient in dealing with the current cross-border transactions.

6. Fees and exchange rates

Cross-border transactions involve additional charges, unlike physical payments. A bank incurred several charges for transferring funds outside its country. Generally, the currency values have to be calculated according to the exchange rate in the specific country.

7. Compliance issues

The organization, while engaging in cross-border transactions, has to go through various compliance requirements to prevent money laundering activities and financial crimes. Every organisation has different kinds of compliances that are to be fulfilled, and thus, the same is time-consuming and requires attention to detail to avoid any complications.

How do Cross-Border Transactions Work

Cross-border transactions are the method of transferring a fund from one country to another country where the payer and payee reside in a different country. Such cross-border transactions are conducted through banks or financial institutions. Both individuals and companies are often engaged in such transactions as currency conversions. There are several methods to deal with cross-border transactions depending on the number of transactions, speed of transactions, currencies, cost and fees of transactions, geographical locations, etc. Some of the common methods of cross-border transaction method are:

• Wire Transfer

Wire transfer is a method of transferring funds from one bank to another financial institution. Such wire transfers are usually used for large amounts of transactions.

• Credit Card transactions

Credit card transactions are cashless transactions that are usually accepted by customers across the globe.

• Electronic Funds Transfer

Electronic Funds Transfer is a faster way of transferring a fund in a different country. The common electronic fund transfers are electronic bank transfers, e-cheques, or electronic payments.

• International Money Orders

International money orders are generally used for a smaller number of funds transactions based on paper-based payment methods such as through mail or electronically transmitted through a third-party service provider.

• Online Payments Platform

Online payment platform refers to the digitalisation of the payment method either through a mobile device or a computer-based software sitting at your home.

• Cryptocurrencies

With the growing digitalisation, cryptocurrencies such as Bitcoin and Ethereum are some of the decentralised digital currencies that may be used for cross-border transactions.

What are cross-border transaction payments used for?

Cross-border transaction payments are used for multiple purposes, boosting the global economy and enabling the flow of money across the globe in a very wide range.

1. International Trade

An organisation that is connected with the export and import businesses is often exposed to cross-border transactions.

2. Travel and Tourism

Cross-border transactions, such as flight bookings, hotels, tours, travel packages, etc., are common among internal travellers.

3. Remittances

Individuals can transfer and send money to their family members or friends living in foreign nations through cross-border transactions.

4. Investment

Cross-border transactions are also used for buying investments such as stocks, bonds, and real estate in foreign countries.

5. International charitable donations

Cross-border transactions allow individuals or organisations to make an international charitable donation to various non-profit organisations to show support to such specific causes and awareness.

Conclusion

Thus, a cross-border transaction means transferring funds from one country to another by an individual or a company comprised of both retail and wholesale transactions. However, there are various challenges in such transactions, such as cost, time, laws, compliances, etc. With the growing digitalisation, various technologies have been introduced to ease the procedure for cross-border transactions, making the global economy interconnected in the past decades.

With the increasing number of cross-border transactions, several financial crimes like money laundering and terrorist financing are exposed. Therefore, in India, a law named PMLA or Prevention of Money Laundering is implemented to fight against such cross-border transactions.

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