Financial Intelligence Unit

Suspicious Activity Monitoring and Reporting to FIU

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.

What is 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

Legal Interplay of PMLA and FIU

The legal interplay of PMLA and FIU can be understood through the following provisions of PMLA, which help in better Suspicious Activity Monitoring:

Section 11 A

 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).

Section 12

 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.

Section 12A

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.

Section 13

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.

Section 14

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.

 Section 50

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

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.

 Section 69

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^[1], 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.

Suspicious Activity Monitoring and Reporting to FIU

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.

Constituents of a Suspicious Activity/ Transaction

 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-  

• Gives rise to a reasonable ground of suspicion regarding the involvement of proceeds of an offence specified in the Schedule to the Act,  irrespective of the value involved; or
• Appears to be made in a situation of unusual or unjustified complexity; or
• Appears to be devoid of economic rationale or bona fide purpose; or
• Gives rise to a reasonable ground of suspicion  of being involved in the financing of the  terrorist activities

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:

•  Difficulties in the verification of the clients or the clients being uncooperative
• Asset management services for clients where there is a lack of clarity regarding the source of the funds or not in consonance with the clients’ apparent standing or business activity
• clients located in high-risk jurisdictions;
• the substantial rise in business without apparent cause;
• Transfer of large funds by the clients to or from overseas locations with instructions for cash payment
• Attempted transfer of investment proceeds to apparently unrelated third parties;
• Unusual transactions by CSCs and businesses are taken up by offshore banks and financial services.

Types of Reports for Reporting to FIU

 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

Suspicious Transaction Report

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.

Cash Transaction Reports (CTRs)

The PMLA and PML Rules put an obligation to furnish details of the below-mentioned cash transactions on every banking company.

1. All cash transactions with a value> Rs. 10, 00, 000 rupees or its equivalent in foreign currency.
2. All series of cash transactions which are integrally connected to each other valued > 10 00 000 or it’s equivalent in foreign currency wherein such series of transactions have occurred within a month.

Cross Border Wire Transfer Reports (CBWTRs)

 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.

NPO Transaction Reports (NTRs):

 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.

Counterfeit Currency Reports (CCRs):

 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.

Format for Reporting to FIU

The applicable reporting format will depend on the type of transactions that are being reported.

Type of Report	Applicable Reporting Format
Cash Transaction Report (CTR)	Account-based reporting format (ARF) for Account-based transactions
Suspicious Transaction Report (STR)	Account-based reporting format (ARF) for Account-based transactions
Non Profit Organisation Transaction Report (NTR)	Transaction-based reporting format (TRF) for other Transactions (Transactions without an account-based relationship with the customer. E.g. money transfer service, money exchange
Counterfeit Currency Report (CCR)	CCR reporting format (CRF)

•  The submission of the Cash Transaction Report (CTR) (wherever applicable) for each month shall be made by the 15th of the succeeding month to the FIU-IND.
• The Suspicious Transaction Report (STR) must be filed within seven days of the end of any transaction, cash or non-cash, or a series of suspicious transactions that are all connected and fit together. The principal officer shall record his reasons for treating any such transaction or series of transactions as suspicious. It must be ensured that there isn’t any undue delay in the arrival of such a conclusion.
• The non-profit organisation transaction reports (NTRs) for each shall be submitted to FIU-IND by the 15th of the succeeding month.
• The responsibility for the timely submission of the CTR, STR, and NTR to FIU-IND is entrusted to the principal officer.
• In the absence of any cash or suspicious or non-profit organisation transactions to be reported, there is no need to make any reports to FIU-IND.
•  Registered intermediaries won’t put any restrictions on operations in the accounts where a suspicious transaction report has been made. The disclosure (tipped off) of the fact regarding the FIU being reported or provided the information relating to STR is prohibited for the registered intermediaries, their directors, officers, and employees (permanent and temporary).
• This prohibition on tipping off extends even before, during and post the submission of an STR and not only to the filing of the STR and/ or related information. Thus, it must be ensured that there isn’t any tipping off to the client at any level.
•  The registered intermediaries, irrespective of the amount of transactions and/or the threshold limit contemplated for predicate offences provided in part B of the Schedule of the PMLA, 2002, shall file STR upon the existence of reasonable grounds to believe that the transactions involve proceeds of crime.
•  The “proceeds of crime” are inclusive of any property that may directly or indirectly be derived or obtained consequent to any criminal activity that relates to the scheduled offence, and not only the one derived or obtained from the scheduled offence.

Designation of Officers to Ensure Effective Suspicious Activity Monitoring and Reporting to FIU

 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.

Appointment of a Designated Director

 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.

Conclusion

 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