PMLA

Understanding the Implications of PMLA on AIF

Several international initiatives, including UN conventions, the Basel Convention, the Financial Action Task Force (FATF) recommendations, the Vienna Convention, European Commission directives, and related measures, have been put in place over the past few decades to combat money laundering practices. India has signed on to many of these conventions and actively participated in a number of efforts. It enacted Anti-Money Laundering Laws in 2002 in accordance with best practices and recommendations from throughout the world. Beginning in July 2005, the Prevention of Money Laundering Act 2002 (PMLA) went into effect. These regulations must also be followed by alternative investment funds (AIFs), one of the intermediaries governed by the Securities Exchange Board of India (SEBI). This article talks about the effects of PMLA on AIF.

What is an Alternative Investment Fund (AIF)?

Any fund established or incorporated in India in the form of a trust, company, limited liability partnership, or other body corporate that:

1. Is a privately pooled investment vehicle that gathers funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors; and
2. Is not covered by the Securities and Exchange Board of India (Mutual Funds).

Can be termed an alternative investment fund (AIF)

However, for the purposes of understanding the effects of PMLA on AIF, the following are not considered alternative investment funds:

• ESOP Trusts established in accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 or as approved by the Companies Act, 2013;
• Family trusts established for the benefit of “relatives” as defined by the Companies Act, 2013;
• Employee welfare trusts or gratuity trusts established for the benefit of employees;
• “Holding companies” as defined in sub-section 46 of section 2 of the Companies Act, 2013;
• Other special-purpose vehicles not established by fund managers, including securitisation trusts, regulated under a specific regulatory framework;
• Funds managed by securitisation companies or reconstruction companies registered with the Reserve Bank of India under Section 3 of the Securities and Exchange Board of India Regulations.
• Any such pool of funds that are directly governed by another Indian regulator.

Effects of PMLA on AIF

The most important effects of PMLA on AIF include the following reporting requirements in relation to the investors of an AIF. These reporting requirements are:

• All suspicious transactions (suspected to be connected with proceeds of crime);
• Cash transactions;
• Transactions involving receipts by non-profit organisations (NPOs) with a value of more than 1 million Indian rupees or the equivalent; and
• All cross-border wire transfers of more than 500,000 Indian rupees or the equivalent.

The above-mentioned barrier is useless for the AIF business in India because each investor is required to make a minimum investment of 10 million Indian rupees.

Similar to this, SEBI periodically issues instructions on the transactions that its regulated intermediaries must report, and it provides a list of illustrative situations, such as suspicious transactions where the source of the funds is unclear or inconsistent with the client’s apparent standing or business activity, or investors based in high-risk jurisdictions.

Whether investments made by family offices need to be recorded is one of the uncertainties the business encounters. Trusts are a popular investment tool used by family offices. On the surface, all trusts are covered by the NGO definition. It should be able to assert that family offices are not covered by NGOs based on an interpretation, following the legislative intent and further depending on FATF principles. Furthermore, “receipts by an NGO” rather than “investments by an NGO” must be recorded. Normally, the bank that manages the NGO’s bank account would be the one obligated to record such receipts by NGOs, not the AIF.

PMLA on AIF dealing with Investments made by Non-Resident Indians

Investments made by Indians who are not residents are another form of transaction. Foreign currency cross-border transactions must be declared according to the PMLA laws. In reality, the money is initially received in the investor’s local bank account before it is transferred to the AIF. Additionally, the bank is the one that receives the funds and is responsible for reporting the relevant transactions to the FIU-IND. Additionally, even if the AIF receives the funds directly from abroad, they would still be routed through an approved dealer (often the bank that manages the AIF’s bank account), and as a result, they must be reported by that authorised dealer. Anyhow, the AIF won’t have all the data required to be provided in Form CBWTR, indicating that only the institution receiving the foreign currency remittance is required to disclose such activities. Additionally, the SEBI Master Circular makes no mention of such transactions that intermediaries are required to record.

SEBI’s AML and KYC Regulations on AIF

Based on the effects of PMLA on AIF and its regulations, as well as the Financial Action Task Force’s (FATF) anti-money laundering standards guidelines, SEBI released a Master Circular on AML and CFT on October 5, 2019. Additionally, SEBI has released numerous circulars instructing SEBI registered intermediaries on the required consistent KYC procedure. The basic summary of the prerequisites is provided below:

KYC

All SEBI-registered intermediaries will do KYC using a uniform form, and all RIs will use the same supporting documentation. Both individuals and legal companies are required to utilise the KYC template that CERSAI^[1] has finalised.

All SEBI-registered intermediaries are required to perform initial KYC on their clients, including in-person verification, and submit the KYC information to KRA and CERSAI. In order to do this, the SEBI intermediary would need to register on one of the KRAs and the CERSAI. Every RI is required to submit an electronic copy of the customer’s KYC records to CERSAI and KRA within ten days of the start of an account-based relationship with the client. Individual data was posted to CERSAI up until April 2021, while legal entities’ data was uploaded to KRA as well as CERSAI. Individuals’ and legal entities’ KYA data will be uploaded to KRA and CERSAI starting in April 2021. Currently, there is no connection between the SEBI-registered KRAs and the CERSAI’s CKYC system. According to a recent notification dated March 10 2021, the information on non-individuals up until April 2021 will be uploaded on CERSAI as and when updated KYC records are obtained from the client in accordance with the client monitoring and due diligence policy of the RI.

AML

Written anti-money laundering policies: Each registered intermediary must create written policies to carry out the PMLA’s anti-money laundering regulations. These procedures must, among other things, address the following three particular aspects of the general “Client Due Diligence Process”:

• Client acceptance policies;
• Client identification processes (KYC);
• Transaction monitoring and reporting, particularly for Suspicious Transactions Reporting; (STR).
• Keeping records for a minimum of five years. Records should indicate the transaction’s nature, value, date, and parties.

Registration with FIU-IND and Reporting Suspicious Transactions

Intermediaries must make sure that the necessary steps are taken to make it possible to identify suspicious transactions and that they have the necessary reporting processes in place. Intermediaries must base their decisions on the definition of a suspicious transaction found in the PML Rules, as updated from time to time.

Principal Officer and Designated Director Appointments

To guarantee that adherence to PMLA on AIF, registered intermediaries must nominate senior officers as Principal Officers and Designated Directors. RI must inform FIU-IND of information such as name, designation, and address.

List of Designated Persons and Entities

A current list of people and organisations that are subject to various sanctions, such as the freezing of assets or accounts or the denial of financial services, as determined by the Security Council Committee established in accordance with various Security Council Resolutions of the United Nations (UNSCRs). The names of anyone whose name appears on said list are not to be used to open accounts, and registered intermediaries are instructed to follow this rule. In order to make sure that no accounts are owned by or connected to any of the organisations or people on the list, registered intermediaries must constantly scan all active accounts. Any accounts containing information that resembles any of the people or companies on the list must be promptly reported to SEBI and FIU-IND. Any accounts containing information that resembles any of the people or companies on the list must be promptly reported to SEBI and FIU-IND.

Employee Recruitment, Employee Development, and Investor Education

The licenced intermediaries must have sufficient hiring practices in place to guarantee high standards. To ensure that staff employees are properly taught AML and CFT procedures, there should be a continuous employee training programme. The clients of intermediaries should be made aware of these AML and CFT framework rules. To inform the client of the goals of the AML/CFT programme, intermediaries must create specific material, booklets, etc.

Non-Compliance Effects of PMLA on AIF

A reporting entity may be subject to fines under the PMLA ranging from 10,000 to 100,000 rupees for each failure to maintain records or provide information in the manner required by the PMLA and its rules. Further, Section 11B of the SEBI Act 1992, among other laws, gives the SEBI the authority to regulate the securities market by any means it sees fit and to revoke the licence of an intermediary for failure to comply with the directions.

Conclusion

Any fund established or incorporated in India that is considered an AIF must comply with the provisions of the Prevention of Money Laundering laws. Further, in order to understand the effects of PMLA on AIF, it is important to also understand the implications of KYC, AML and other SEBI master circulars and guidelines.

Read Our Article: Tracing the Developments in the Prevention of Money Laundering Act, 2002