- PMLA Maintenance of Records – Second Amendment Rules, 2023
The Ministry of Finance, Department of Revenue, has issued the Prevention of Money-Laundering (Maintenance of Records) Second Amendment Rules, 2023 ("Second Amendment Rules") vide notification dated September 4, 2023, introducing certain amendments to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 ("Maintenance of Record Rules").
- Amendment to the definition of "Principal Officer" of a reporting entity
Earlier, the "Principal Officer" was defined as any individual designated by the reporting entity who is responsible for furnishing information to the Financial Intelligence Unit ("FIU"); now, as per the revised definition, only those individuals who are officers at the management level can be designated as Principal Officers of a reporting entity.
With this amendment, management level officers are made responsible for reporting requirements under the Prevention of Money Laundering Act ("PMLA") and the rules made thereunder, with the aim of ensuring better compliance.
- Amendments in relation to client due diligence
Rule 9 of the Second Amendment Rules broadly deals with the obligation of client due diligence of every reporting entity, requiring every reporting entity at the commencement of an account-based relationship to verify the identity of its clients, obtain information on the intended nature of the business relationship, determine whether a client is acting on behalf of a beneficial owner and, if so, identify the beneficial owner and take all steps to verify the identity of the beneficial owner.
By way of the Second Amendment Rules, the definition of a "beneficial owner" with respect to the partnership firm, has been expanded to include any individual who has the right to control the management or make policy decisions in a partnership firm.
The Second Amendment Rules have also altered the threshold for defining a beneficial owner to a partnership firm, reducing the threshold from an individual having 15% of capital or profits of the partnership to 10%.
Rule 9 (10) of the Maintenance of Record Rules provides that in case a juridical person is a client of a reporting entity, the reporting entity shall verify that any person purporting to act on behalf of such client is so authorized and should verify the identity of that person. By way of the Second Amendment Rules, a proviso has been introduced stipulating that, when the client of a reporting entity is a trust, then the trustees of such trust are required to disclose their status at the time of commencement of an account-based relationship with the reporting entity or while carrying out transactions of certain thresholds, as prescribed under the Maintenance of Record Rules.
These Second Amendment Rules are yet another step taken by the Ministry of Finance in tightening the anti–money laundering regime in India, ahead of the Financial Action Task Force evaluation slated to be held later this year.
- Foreign Portfolio Investors – linkage with anti-money laundering law
The Securities and Exchange Board of India ("SEBI") has notified certain amendments to the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 ("SEBI FPI Regulations") These amendments have been brought by the Securities and Exchange Board of India (Foreign Portfolio Investors) (Second Amendment) Regulations, 2023 vide notification dated August 10, 2023 ("Amendment Regulations").
Prior to the Amendment Regulations, Sub-Regulation 4(f) provided that an application for grant of certificate of registration of a foreign portfolio investor should be considered when the (i) applicant itself; or (ii) its underlying investor contributing 25% or more in the corpus of the applicant or identified on the basis of control; is/are not person(s) mentioned in the sanctions lists as notified from time to time by the United Nations and are not residents in countries highlighted as deficient in a specific manner by the Financial Action Task Force.
Pursuant to the Amendment Regulations, the threshold of "25%" has been replaced with a reference to the thresholds prescribed under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ("PMLA Rules") . These thresholds, which vary depending on the nature of the entity, pertain to the identification of a "beneficial owner" for the purposes of the client due diligence to be conducted by reporting entities.
For example, for a company, the threshold for a "beneficial owner" under the PMLA Rules is a natural person, ownership of or entitlement to more than 25% of shares or capital or profits of the company or exercising control (as defined in the PMLA Rules) through other means. For a partnership firm, the corresponding threshold is 10% of capital or profits or exercising control (as defined in the PMLA Rules) through other means. For a trust, the corresponding threshold is the author of the trust, the trustee, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership. In case the entity or the owner of the controlling interest is an entity resident in jurisdictions notified by the Central Government and listed on stock exchanges in such jurisdictions notified by the Central Government, or it is a subsidiary of such listed entities, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such entities.
Thus, the SEBI FPI Regulations now consider an underlying investor's worth in evaluating a registration application at par with a "beneficial owner" under India's anti–money laundering law, bringing parity in the concepts under the two regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
