Meaning and Implication of Section 12 under PMLA

Raghvendra Sonker

06 Aug, 2022

The Prevention of Money Laundering Act, 2002^[1] was enacted to curb money laundering and terror financing activities. All financial institutions, including banking companies, non-banking financial companies and intermediaries, should verify the details of the clients and maintain records. This maintained data on the clients shall be furnished to the Finance Intelligent Unit-IND and other enforcement agencies.

Meaning of Section 12 of the PMLA

Section 12 of the PMLA, 2002 falls under chapter IV, which obligates Banking Companies, Financial Institutions and Intermediaries to report and maintain records. Section 12 empowers the regulator to prepare and publish rules and guidelines for maintaining records of the transactions and clients. Making it mandatory for every reporting entity to maintain a record and report all transactions to the Director of FIU-IND; and submit such reports at intervals as prescribed by Rules 3, 4, 5, 7 and 8 of the Prevention of Money Laundering (Maintenance of Records) Rules 2005.

Who is a Reporting Entity?

According to Section 12 under PMLA, a reporting entity is a banking company, financial institute intermediary, and an individual carrying out designated business activities.The Real estate agents/ brokers are considered reporting entities for the purpose of PMLA Rules, 2005.All reporting entities must furnish the following reports to the Financial Intelligence Unit of India (FIU-IND): Counterfeit Currency Reports, Cash Transactions Reports, Suspicious Transaction Reports, and Non-Profit Organisation reports.

Maintenance and Reporting of Records

The provisions of the PMLAct, 2002 and Prevention of Money Laundering (Maintenance of Records) Rules, 2005, provide for the maintenance and reporting of records. Section 12(1)(a) of the PMLA, 2002makes it mandatory for reporting entity to maintain the details of all transactions, whether attempted or executed. The information related to the amount of transaction, currency denomination, date, and parties to the transaction shall be furnished to the Director of Finance Intelligent Unit- IND. 

Obligations under Section 12 of the PMLA

 The obligation of Banking, Financial Institute, and Intermediary to maintain the records of transactions is defined in Section 12 under PMLA. Such transactions are:

• A reporting entity should maintain the records of all the financial transactions with respect to the prescribed nature and value of such transactions;
• Transactions may comprise a single transaction, cash transitions, wire transfers, connected transactions or a series of transactions taking place within a particular period;
• All cash transactions having a value above Rs. 10 Lakhs or its equivalent in the foreign denomination;
• A series of all cash transactions connected integrally having a value less than Rs. 10 Lakhs completed within a month;
• Receipts by non-profit organisations valued more than  Rs. 10 Lakhsor its equivalent in the foreign denomination;
• All such transactions where counterfeit currency and forged valuable security or documents have been used;
• All suspicions transactions related to cash  deposits and withdrawals; cheques, demand draft, electronic payments, travellers’ cheques, remittances, credits or debit into any non-monetary bank accounts such as D- mat accounts;
• All cross-border transactions having a value of more than Rs. 5 Lakhs, whose destination or origin of funds, are in India;
• Any sale or purchase of immovable property having a value of Rs. 50 Lakhs or more;
• Information related to such transactions shall be furnished to the Financial Intelligence Unit of India;
• Maintain and verify records of all its clients.

Procedure for Maintaining Records and Furnishing Information

A reporting entity should follow the procedure and manner specified by the regulator for maintaining the information of its client’s transactions. Reporting entities shall regularly adopt and update the internal mechanism to maintain such information.

Section 12(1)(b) of the Prevention of Money Laundering Act, 2002 mandates reporting entity to furnishinformation to the director within the specified time. The following procedure and manner for furnishing information are:

• A reporting entity should communicate the name and address of the designated director and the principal officer to the Financial Intelligence Unit of India;
• The Principal Officer should furnish all the information related to the nature and value of the transactions.
• Every reporting entity shall have an internal mechanism in place.
• Every reporting entity is responsible for adhering to the regulator’s guidelines for maintaining and furnishing documents.

Implications of Non-Compliance of Section 12 under PMLA

Specific implications are imposed when a reporting entity fails to comply with the obligations under section 12  of PMLA, 2002. After the Finance Intelligence Unit of India (FIU-IND) makes an inquiry and finds that the designated director, board of the company, and employees have failed to comply with the obligations prescribed, specific actions may be taken:

1. Issue a warning in writing;
2. Direct such reporting entity to comply with specific instructions;
3. To send regular reports at particular intervals over the measures taken;
4. The monetary penalty is imposed on regulating entity 10000 – 1 lakh for each failure.

Conclusion

Through the provision of PMLA, 2002 and Prevention of Money-laundering (Maintenance of Records) Rules 2005, the government of India has ensured to keep track of all kinds of financial transactions achieved in the banking ecosystem. This check-in place plays a significant role in unearthing financial frauds and scams at the nascent stages.

Read our Article: Underlining the Scope of Investigation under PMLA