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The Prevention of Money Laundering Act, 2002 (PMLA), and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (Maintenance of Records Rules), as amended from time to time and notified by the Government of India, obligate every reporting entity, including intermediaries defined under Section 12 of the SEBI Act and stock exchanges, to abide by the procedures regarding account opening of clients, maintaining records, and reporting such transactions in the prescribed manner to the FIU.The Maintenance of Records Rules, inter alia, empower SEBI to specify the information that must be maintained by the intermediaries and the procedure, manner, and form for the maintenance of such information. It also mandates the reporting entities to devise an internal mechanism regarding any guidelines issued by the regulator for detecting the transactions specified in the Maintenance of Records Rules and for furnishing information thereon in such form as may be directed by the regulator. The present article shall focus on suspicious activity monitoring and reporting to the FIU.
Financial Intelligence Unit India (FIU-IND) is a national agency set up by the Central Government on November 18th, 2004 with the intent of scrutinising suspected financial transactions. Under the Prevention of Money Laundering Act of 2002, the organisation is responsible for receiving, processing, analysing, and disseminating financial transactions in order to strengthen national efforts to combat suspected financial transactions and money laundering offences. It is an independent and autonomous agency falling under the Finance Ministry, which reports directly to the Economic Intelligence Council (EIC), which is headed by the Finance Minister of India. The reporting to the FIU is done after the Suspicious Activity Monitoring
The legal interplay of PMLA and FIU can be understood through the following provisions of PMLA, which help in better Suspicious Activity Monitoring:
This section mandates every reporting entity (banking companies, financial institutions, intermediaries, and designated non-financial businesses and professions) verify the identity of its clients and beneficial owners using Aadhaar, passports, and other officially valid documents (OVDs).
Every reporting entity is obligated to maintain records of all transactions, furnish information on prescribed transactions to the Director, FIU-India, and verify the identity of their clients and their beneficial owners in the prescribed manner as per this section.
The entities that report must keep records of transactions and who their clients are for 5 years. The PML (Maintenance of Records) Rules prescribe the requirements for the maintenance of records and reports to be furnished to FIU-India.
This section of the PMLA provides the powers to the director for calling additional information from a reporting entity, which has an obligation to maintain confidentiality. Section 12AA mandates every reporting entity to conduct enhanced due diligence before commencing specified transactions as notified by the government.
The director of FIU IND is empowered to enquire into cases regarding the obligations of the RE, along with the issuance of warnings, directions for compliance, and imposition of sanctions, including monetary penalties on the RE, its designated director, or any of its employees.
This section states that the reporting entity, its directors, and its employees won’t be liable for any civil or criminal proceedings being initiated against them for furnishing information to FIU-India.
According to this section, the Director, FIU-India, has the powers of a civil court as per the CPC for enforcing the attendance of any person, compelling the production of records, receiving evidence on affidavits, and issuing a commission for the examination of witnesses.
Section 66 deals with disseminating the information by FIU-India to any officer, authority, or body that performs any function under any law with regard to imposing any tax, duty, or levy or dealing in foreign exchange or the prevention of illegal drug trafficking, or to any officer, authority, or body notified by the Central Government. Additionally, if provisions of any other law for the time being in force are violated, FIU-India can also share information with the concerned agency.
This Section enables the recovery of fines imposed by the Director in the event of non-payment of the same within six months from the date of imposition of the fine or penalty, and the powers of a Tax Recovery Officer under the ITA, 1961, can be exercised for this purpose. The fines so imposed are recovered in the same manner as prescribed in Schedule II of the ITA, 1961, for the recovery of arrears.
All registered intermediaries must make sure that the right steps are taken to be able to spot suspicious transactions and have the right ways to report them. While determining suspicious transactions, registered intermediaries would be guided by the definition of a suspicious transaction provided in the PML Rules, as amended from time to time.
It is essential to be aware of the constituents of a suspicious transaction for efficient suspicious activity monitoring. As per Rule 2(1) (g) of the PML Rules, the following activities can be considered suspicious activity, which shall attract suspicious activity monitoring:
If any transaction-
Shall be considered a suspicious transaction.
Some other circumstances are listed below for illustrative purposes, as the transaction being suspicious is dependent on the background, details of the transactions, and other facts and circumstances:
The collection of information by FIU-India from reporting entities (REs) is done through various reports, which must be mandatorily submitted by them. All reports are to be filed online only, along with the digital signature of the principal officer of the concerned reporting entity. The types of reports that must be submitted for the purpose of suspicious activity monitoring and reporting to FIU
The first type of report that helps in suspicious activity monitoring is the suspicious transaction report, which contains information regarding the transactions considered suspicious as per Rule 2(1)(g) of the PML Rules 2005.
The PMLA and PML Rules put an obligation to furnish details of the below-mentioned cash transactions on every banking company.
The PMLA, 2002, and the Rules mandate the maintenance and furnishing of records regarding cross-border wire transfers > Rs. 5 lakhs or their equivalent in foreign currency by every reporting entity wherein either the origin or destination of the fund is in India.
According to the PMLA, 2002, and the Rules, the report of all transactions that involve receipts by non-profit organisations of value > Rs. 10 lakhs or its equivalent in foreign currency must be submitted every month to the Director, FIU-India, by the 15th of the succeeding month in the prescribed format.
Non-Profit Organisation (NPO) means any entity or organisation registered as a trust or a society as per the Societies Registration Act, 1860 or any other similar state legislation, or a company registered under Section 8 of the Companies Act, 2013.
According to the PMLA rules, reporting entities (REs) must report all cash transactions where there has been the usage of forged or counterfeit currency notes or bank notes as genuine, or where there has been an occurrence of any forgery of a valuable security or document.
The applicable reporting format will depend on the type of transactions that are being reported.
To ensure the proper discharge of legal obligations of the reporting intermediaries with regard to reporting suspicious transactions to the relevant authorities, the principal officer shall be acting as a central reference point in facilitating the onward reporting of the suspicious transactions and playing an active role in the identification and assessment of potentially suspicious transactions, and shall have access to and be able to report to senior management at the next reporting level or the Board of Directors. Names, designations, and addresses (including email addresses) of the Principal Officer’, inclusive of any changes therein, must also be communicated to the Office of the Director, FIU-IND. Principally, it is advisable that the ‘Principal Officer’ be in a sufficiently senior position and be able to discharge the functions with independence and authority.
In addition to the existing need for the designation of a principal officer, the registered intermediaries must also designate a person as a designated director.
In terms of Sec. 13(2) of the PMLA, the Director, FIU-IND, can take appropriate action, including levying a monetary penalty, on the Designated Director for the failure of the intermediary with regard to compliance with any of its AML/CFT obligations.
Registered intermediaries must communicate the details of the Designated Director, such as name, designation, and address, to the Office of the Director, FIU-IND.
Suspicious activity monitoring and reporting to the FIU play a vital role in tackling money laundering. The FIU has collaborated with various financial institutions and foreign financial intelligence units to develop methods to combat this issue. The mandate by SEBI, which requires the reporting entities to devise an internal mechanism with respect to any guidelines issued by the regulator for the detection of the transactions specified in the Maintenance of Records Rules and for furnishing information thereon as the regulator directs, can also help in efficient Suspicious Activity Monitoring.
Also Read: Identification of Suspicious Transactions under IFSCA AML/CFT Guidelines 2022
Shubhangi has completed her B. A.LLB (H) with specialization in Business Laws from Amity University. She is particularly interested in legal research and writing and wishes to utilize her knowledge to create informative legal content. She has prior experience in corporate and criminal litigation and has great drafting skills. She has also published various research papers in reputed journals.
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