Obligations of Banking Companies, Financial Institutions and Intermediaries under PMLA, 2002

Shubhangi Jain

14 Apr, 2023

The Obligations of Banking Companies, Financial Institutions and Intermediaries are prescribed under Chapter IV of the Prevention of Money Laundering Act 2002 (PMLA^[1]). Such obligations are prescribed with the aim of avoiding money laundering by keeping track of the transactions of the bank account holders and by maintaining the records of the same. The present articles shall discuss the obligations as enumerated in the said Act.

What are the Obligations of Banking Companies, Financial Institutions & Intermediaries under PMLA, 2002?

The obligations of Banking Companies, Financial Institutions & Intermediaries are provided in Chapter IV of the PMLA under sections 12 to 15. However, it is essential to understand the meaning of Reporting Entity before discussing the obligations of the same.

Meaning of Reporting Entity under PMLA, 2002

 As per Section 12 under PMLA, a reporting entity can be Banking Companies, Financial Institutions & Intermediaries, and an individual carrying out designated business activities. The Real estate agents/ brokers are considered reporting entities for the purpose of PMLA Rules, 2005. The obligations of such entities are discussed herein under

Maintenance of Records by Reporting Entity 

Section 12 of the Act provides for the obligation of the reporting entities.

• Every reporting entity (RE) has an obligation the maintenance of records of all transactions in a manner which can facilitate the reconstruction of individual transactions.
• Furnish information relating to such transactions, whether attempted or executed, to the Director within such time  in the prescribed manner, the nature and value of which may be prescribed;
• The (RE) must also maintain a record of documents which can provide evidence with regard to the identity of its clients & beneficial owners, along with the account files and business correspondence relating to its clients.
• All the information which the reporting entity maintains, furnishes, or verifies must be kept confidential.
• The record of such information must be kept for a period of 5 years, calculated from the date of the transaction between a client and the reporting entity.
• The records must be maintained for a period of 5 years post the end of business relationship between a client and the reporting entity or the closure of the account, whichever is later.
• The Central Government may, by notification, provide an exemption to any reporting entity or class of reporting entities from any obligation under this Chapter

Providing Access to Information

• The Director may call for any relevant records from any Banking Companies, Financial Institutions and Intermediaries, along with any additional information as deemed necessary by him for the purpose of this Act.
• Such information must be furnished by the reporting entities to the Director within the prescribed time and manner as specified by him.
• All such information which has been provided by the Banking Companies, Financial Institutions and Intermediaries to the director must be kept confidential.

Conduct Enhanced Due Diligence

 All Banking  Companies, Financial Institutions and Intermediaries must carry out the following before commencing each specified transaction —

• Verification of the client’s identity undertaking such specified transaction by authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, in the prescribed manner as per the prescribed conditions

However, where  the authentication of the person  not being entitled to obtaining an Aadhaar number under the provisions of the said Act  is required for the purpose of verification, such verification for the authentication of the client’s identity undertaking the  specified transaction shall be  conducted by such other process or mode, as prescribed ;

• Take additional steps for the examination of the ownership and financial position, including the sources of funds of the client,  in a prescribed manner.
• Take the prescribed additional steps for recording the motive behind carrying out the specified transaction and the intended nature of the relationship b/w the transaction parties.
• In the event of the failure of the client towards the fulfilment of the conditions laid down under sub-section (1), the Banking Companies, Financial Institutions and Intermediaries won’t allow for the specified transaction to be carried out.
• Wherein any specified transaction or series of specified transactions that the client has undertaken is considered suspicious or likely to have involvement with proceeds of crime, the Banking  Companies, Financial Institutions and Intermediaries would be increasing the future monitoring of the business relationship with the client, including greater scrutiny or transactions in the prescribed manner.
• The information obtained through the application of the enhanced due diligence measures under sub-section (1) must be maintained for a period of 5 years from the date of the transaction between a client and the reporting entities.

Director’s Power to Impose Fine

• The Director is empowered to impose fine on the Banking Companies, Financial Institutions pursuant to section 13 of the Act, wherein the Director can conduct an inquiry either by his own motion or on the receipt of an application by any person, officer or authority who requests him to conduct such inquiry as deemed fit by the Director.
• At any stage of the inquiry proceeding before the Director, he can direct the Banking Companies, Financial Institutions for the production of the specified records whose audit must be carried out by an accountant who is a part of the panel of accountants maintained by the Central Govt if he is of the opinion that producing such records is necessary after considering the nature and complexity of the case. 
• If it is discovered by the Director, during any inquiry, that such entities or their designated director on the Board or any of its employees have failed to adhere to the obligations, he can take the following actions without prejudice to any other action that might be taken under any other provisions of this Act.
• Issuing a warning in writing; or
• Directing for compliance with specific instructions to such RE, its designated director on the Board or any of the  employees,
• Directing such entities for sending reports in the prescribed intervals  on the measures taken  by them, their  designated director on the Board or any of  the employees
• Imposing a monetary penalty, a minimum of Rs 10,000, which can be extended to Rs 1,00,000 for each failure by an order on such Banking Companies, Financial Institutions, Intermediaries, their designated director on the Board or any of its employees.

A copy of the order must be forwarded by the Director to every reporting entity or a person who is a party to the proceedings under that sub-section.

Non Initiation of civil or criminal proceedings against, Banking Companies, Financial Institutions, Intermediaries, its directors and employees in certain cases

The Banking Companies, Financial Institutions, Intermediaries, its directors and employees would not be liable for any criminal or civil proceedings being initiated against them for furnishing information under Section 12(1) (b)

Procedure and manner of furnishing information by the Banking Companies, Financial Institutions & Intermediaries

The Central Government may, after consulting with the  RBI, prescribe the procedure and the manner for maintaining and furnishing information to such reporting entities, as per section 11A Section 12 (1) and 12AA (1)  for the purpose of implementing the provisions of this Act.

Conclusion

It is essential for all Banking Companies, Financial Institutions, and Intermediaries to comply with the obligations as provided in Chapter IV of the Act in order to avoid the complexities consequential to the non-compliance of such obligations.

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