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General Studies 2 >> Governance

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PMLA

PMLA

1. Context 

The Finance Ministry has amended money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries.
In addition, it has defined "politically exposed persons" (PEPs) under the Prevention of Money Laundering Act (PMLA) in line with the recommendations of the Financial Action Task Force (FATF).

2. About PMLA

  • The Anti-money laundering legislation was passed by the National Democratic Alliance government in 2002 and came into force on July 1, 2005.
  • The PMLA was showcased as India's commitment to the Vienna Convention on combating money, drug trafficking and countering the financing of terror (CFT).
  • The law was aimed at curbing the process of converting illegally earned money into legal cash.
  • The Act empowered the Enforcement Directorate (ED) to control money laundering, confiscate property and punish offenders.
  • ED recorded around 5,422 cases, attached proceeds to the tune of ₹ 1,04,702 crores (approx), filed Prosecution Complaints in 992 cases resulting in the confiscation of ₹ 869. 31 crores and convicted 23 accused persons under PMLA by the end of March 31, 2022.

3. Effect on crypto

  • The gazette notification by the Ministry brings cryptocurrency transactions within the ambit of PMLA.
  • This means that Indian crypto exchanges will have to report any suspicious activity related to buying or selling of cryptocurrency to the Financial Intelligence Unit-India (FIU-IND).
  • This central agency is responsible for receiving, processing, analysing and disseminating information related to suspicious financial transactions to law enforcement agencies and overseas FIUs.
  • In its analysis, if the FIU-IND finds wrongdoing, it will alert the ED.
  • Under Sections 5 and 8 (4) of the Act, the ED has discretionary powers to search and seize suspected property without any judicial permission.

4. Reasons for tightening the digital trade

  • For a little more than a decade, cryptocurrencies, non-fungible tokens (NFT) and other digital assets enjoyed a regulation-free environment.
  • But, in the past couple of years, as the use of digital assets has gone mainstream, regulators have turned hawkish.
  • The value of all existing cryptocurrencies is about $804 billion as of January 3, 2023.
  • It is about twice the GDP of Singapore in 2021.
  • In India, over 10 crore Indians have invested in cryptocurrencies.
  • The illegal use of cryptocurrencies hit a record $ 20.1 billion last year. 
  • Transactions associated with sanctioned entities jumped over 1, 00, 000-fold, making up 44 per cent of last year's illegal activity.

5. Tools used to track money laundering via crypto transactions

  • Tracking money trail in cryptocurrency transactions may require new tools and approaches as such transfers differ fundamentally from traditional banking channels.
  • FIUs may be familiar with Know Your Customer (KYC) or Customer Due Diligence (CDD) norms.
  • But the technological nature of VDAs presents a new challenge in gathering information.
  • This requires the intelligence unit to broaden its intelligence framework.
The Cooperation between FIUs to prevent money laundering and recommends the analysis of crypto wallets, their associated addresses and blockchain records and hardware identifiers like IMEI (International Mobile Equipment Identity), IMSI (International Mobile Subscriber Identity) or SEID (Secure Element Identifier) numbers, as well as MAC addresses.

6. Regulations in other Countries

  • The Global Crypto Regulations Report 2023 a large proportion of countries are at various stages of drafting regulations around crypto.
  • Most countries have already brought digital assets under anti-money laundering laws.
  • Singapore, Japan, Switzerland and Malaysia have legislation on the regulatory framework.
  • The U.S., U.K., Australia and Canada have initiated plans for regulation.
  • So far, China, Qatar and Saudi Arabia have issued a blanket ban on cryptocurrency.
  • The EU is also preparing a cross-jurisdictional regulatory and supervisory framework for crypto-assets.
  • The framework seeks to provide legal clarity, consumer and investor protection and market integrity while promoting innovation in digital assets.

7. The Changes imply

  • The new clause in the rules for PMLA compliance defines "Politically Exposed Persons" as individuals who have been entrusted with prominent public functions by a foreign country, including the heads of State or Governments, Senior politicians, Senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.
  • The amendment is about foreign PEPs and not domestic ones.
  • The move to define politically exposed persons under PMLA is to bring uniformity with a 2008 circular of the RBI for KYC norms/Anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms.
  • PEP has already been in the RBI's master circular, in line with FATF.
  • The definition has now been given in the PMLA rules so that the same definition is applicable everywhere.

8. Significance of the FATF-related changes

  • The amendments assume significance ahead of India's proposed FATF assessment, which is expected to be undertaken later this year.
  • India's assessment is likely to come up for discussion in the plenary discussion in June, while the possible onsite assessment is slated for November.
  • Due to the pandemic and the pause in the FATF's assessment process, the fourth round of mutual evaluation of India had been postponed to 2023.
  • Before this, the FATF had undertaken an evaluation for India in June 2010.
  • The FATF, which is the global money laundering and terrorist financing watchdog, has 40 recommendations.
  • In its recommendations, the FATF states that financial institutions should be required to have appropriate risk-management systems to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation.
  • The broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment.
  • The 40 recommendations cover seven areas and provide a framework of measures.
  • This is to help countries tackle illicit financial flows through laws, regulations and operational measures to ensure authorities can take action to detect and disrupt financial flows that fuel crime and terrorism.
The seven areas are anti-money laundering/ counter-terrorist financing;
  1. Policies and coordination;
  2. Money laundering and confiscation;
  3. Terrorist financing and financing of proliferation;
  4. Preventive measures;
  5. Transparency and beneficial ownership of legal persons and arrangements
  6. Powers and responsibilities of competent authorities and other institutional measures and
  7. International cooperation.

9. Other Changes in the PMLA rules

  • The Amended rules have also lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner, in line with the Companies Act and Income-tax Act.
  • The term "beneficial owner" was defined to mean ownership of or entitlement to more than 25 per cent of shares or capital or profit of the company, which has now been reduced to 10 per cent, thereby bringing more indirect participants within the reporting net.
  • Also, reporting entities are now required to register details of the client if it's a non-profit organisation on the DARPAN portal of NITI Aayog.
  • Every Banking Company or Financial Institution or intermediary, as the case may be, shall register the details of the client, in case of the client is a non-profit organisation, on the DARPAN portal of NITI Aayog, if not already registered and maintain such registration records for five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later.
  • The definition of a non-profit organisation has also been amended and linked to the definition of charitable purpose provided under Section 2 (15) of the Income-tax Act 1961 to include any entity or organisation, constituted for religious or charitable purposes under I-T Act, that is registered as a trust or society under the Societies Registration Act or any similar state legislation or a company registered under the Companies Act.
  • The due diligence documentation requirements, which were until now limited to obtaining the basic KYCs of clients such as registration certificates PAN copies and documents of officers holding an attorney to transact on behalf of the client have now been extended.
  • It now includes the submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlors and authors, as the case may be, depending upon the legal form of the organisation.
  • Also, the details of the registered office address and principal place of business are now required to be submitted by clients to financial institutions, banking companies or intermediaries.

For Prelims & Mains

For Prelims: Money Laundering Act, Financial Action Task Force, Enforcement Directorate, financing of terror, FIU-IND, NFT, Customer Due Diligence, IMEI, IMSI,  SEID, Global Crypto Regulations Report 2023, cryptocurrencies, DARPAN portal of NITI Aayog, Income-tax Act 1961, Societies Registration Act, Companies Act, 
For Mains: 
1. What is the new Amendment to the Prevention of Money-laundering Act and how it will impact politically exposed persons and NGOs? (250 Words)
 
Source: The Hindu and The Indian Express
 

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