PMLA changes raise scrutiny of certain individuals, NGOs | Latest News India - Hindustan Times

PMLA changes raise scrutiny of certain individuals, NGOs

ByRajeev Jayaswal and Neeraj Chauhan, New Delhi
Mar 10, 2023 05:57 PM IST

The Union government tweaked rules on money laundering, putting NGOs and “politically exposed persons” under tighter scrutiny, significantly widening the range of people and entities whose financial transactions agencies such as the Enforcement Directorate will have access to.

The Union government tweaked rules on money laundering, putting non-government organisations (NGOs) and “politically exposed persons” under tighter scrutiny, significantly widening the range of people and entities whose financial transactions agencies such as the Enforcement Directorate will have access to.

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The expanded definitions also included cryptocurrencies under provisions to monitor illicit financial flows.

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The rules were disclosed as part of two gazette notifications by the Union ministry of finance late on Tuesday, with the one related to politically exposed persons (PEP) covering individuals working for a foreign country, senior politicians, functionaries of political parties, senior bureaucrats, judges, and military personnel.

For these people as well as NGOs, banks will need to maintain records on the nature and value of transactions, the new rules add, while also laying down the procedure for how this information will be shared, the time for which such data will be retained, and the manner in which identity records of such clients will be maintained by banking companies, financial institutions and intermediaries.

“The new rules make it mandatory for banking/financial companies to record transactions of several entities and individuals, who were not earlier included in the PMLA (prevention of money laundering act). The provisions virtually include everyone important in politics, senior government officials and even heads of the states, for financial reporting purposes under PMLA,” said a senior official of the Enforcement Directorate, asking not to be named.

To be sure, financial institutions have been required to carry out additional due know-your-customer (KYC) checks for PEPs under Reserve Bank of India guidelines. The new rules now appear to mandate additional transaction recording under PMLA compliances.

The ED is the main agency probing allegations under PMLA.

For NGOs, the new rules add more data retention requirements: every banking company or financial institution must shall register the details of such a client on the DARPAN Portal of Niti Aayog and the records, if not already registered, should be maintained for a period of five years “after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later.”

Experts flagged some concerns.

Abhimanyu Kampani, partner at Luthra and Luthra Law Offices India, said the amendment broadens the definition of a non-profit organisation to now also include organisations that function for charitable purposes including relief to the poor, education or medical relief etc.

“Further, a new category of politically exposed persons (PEP) as defined thereunder, has been added who will be subject to greater scrutiny. Apart from this, the financial institutions shall mandatorily have to register the details of Non-Profit Organisations which are its client on the Niti Aayog Portal and maintain such a record for at least five years,” he said.

“The definition of PEP, however, leaves a lot to interpretation and in the absence of clear markers as to up to what rank, up to how much time after demitting office etc, would an individual be considered a PEP, it would give the authorities too much discretion. Such discretion, if not checked, could easily be misused and it would be best to define the ambiguities left in this amendment,” he added.

Commenting on PEPs, Manavendra Mishra, partner at KCO said “The amendment aims to broaden the scope of the definition of such a beneficial owner of an entity and provides a revised reporting mechanism.”

The tweaks to the PMLA rules, announced in a separate notification, also included those concerning cryptocurrencies, which will now be brought under the ambit of the money laundering watchdog.

These rules brought host of activities carried out “for or on behalf of” another person through cryptocurrencies such as Bitcoin and Ethereum under PMLA. The notified activities included transactions between fiat currencies and crypto, between one crypto and another, safekeeping of such assets and participating or offering financial services based on these.

In other words, this would cover those who carry out transactions as well as those that offer crypto-based financial services, such as some popular Web3 financial services.

A second official aware of ED investigations said the agency was already investigating several cases related to cryptocurrencies, and the new rules will make legal position clearer for both the agency as well as people indulging in fraud via such modes of digital currency.

“A few crypto exchanges were also found allegedly involved in money laundering and ED acted upon them,” he said. As on January 2023, ED attached crime proceeds of about 940 crore, arrested five persons and several cases are pending in courts, he added.

The government has lately expressed concerns over irregularities by cryptocurrency exchanges, e-wallets and mobile gaming apps. Several exchanges and apps, such as WazirX and Coinswitch, have been investigated by ED in last one year.

As of now, cryptocurrencies are unregulated in India, though the government has taxed their withdrawals into rupees. The Reserve Bank of India (RBI) has opposed any measure that can legalise their use as an investment or a currency, saying they can adversely effect the Indian economy.

Experts said the move will bring clarity in combating money laundering and terror financing. Anu Tiwari, partner at law firm Cyril Amarchand Mangaldas called it “positive and much needed for India’s growing Web3 industry”.

According to the second official quoted above, the notification related to NGOs is also meant to strengthen ED’s scrutiny on “religious or charitable” NGOs.

Crypto industry representatives welcomed the move concerning them. Dileep Seinberg, founder & CEO of crypto-fintech platform MuffinPay said: “This is a positive step towards the regulation of the cryptocurrency industry in India. Additionally, this guarantees that all cryptocurrency businesses must include necessary KYC, transaction monitoring, and so on in their processes. Following the enactment of the PMLA, cryptocurrency companies will now be required by law to perform enhanced due diligence.”

Anuj Chaudhary a Crypto Policy Analyst said this is “a good move” for the Indian crypto businesses. “Now, they can streamline their operations as per Prevention of Money Laundering Act (PMLA) guidelines. Earlier, crypto startups were self-reporting their businesses without any compliance. We saw a noticeable exodus from India to crypto-friendly regions such as the Cayman Islands, Dubai, Caribbean Islands, etc,” he said.

“This notification aims to eradicate money laundering via virtual digital assets (VDAs). Individuals who were trying to find ways to launder money via crypto will now face stringent actions from law enforcement agencies. These individuals or Web3 startups cannot evade taxes and launder money to safe havens. Now, they will mandatorily have to report financials to the government of India,” he added.

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