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Reporting norms under PMLA tightened

The finance ministry has widened the scope of the Prevention of Money Laundering Act by tightening reporting norms of “non-profit organisations” and as well as the rules relating to beneficial ownership.

The changes have been brought through a notification amending the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, which prescribes that reporting entities such as banks, financial institutions and intermediaries have to maintain records of all transactions of its clients, verify its clients and furnish information.

“Non-profit organisation means any entity or organisation, constituted for religious or charitable purposes referred to in clause (15) of section 2 of the Income-tax Act, 1961 (43 of 1961), that is registered as a trust or a society under the Societies Registration Act, 1860 (21 of 1860) or any similar State legislation or a Company registered under the section 8 of the Companies Act, 2013 (18 of 2013),” the notification said.

Further, reporting entities are also now required to register clients being non-profit organisations on the DARPAN portal of NITI Aayog and are mandated to maintain the registration records for a period of five years from closure of the business relationship or closure of account, whichever is later.

The DARPAN portal gives a system generated Unique ID to voluntary and non-governmental organisations on signing up on it. The Unique ID is mandatory to apply for grants under various schemes of ministries, departments and governments bodies.

The new amendment also defines politically exposed persons as “individuals who have been entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.

Experts point out that the amendments have also tightened the norms on beneficial ownership by lowering the threshold to 10% of the shares from the earlier 25%. Under the rules, reporting entities such as banks and financial institutions, are on commencement of an account-based relationship, mandated to identify the beneficial owners where the client is acting on behalf of its beneficial owner.

“The term ‘beneficial owner’ was inter alia defined to mean ownership of or entitlement to more than 25% of shares or capital or profit of the company. The threshold of 25% is now reduced to 10% thereby bringing more indirect participants within the reporting net,” said Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP, while adding that the definition of non-profit organisation has been amended and linked to the definition of charitable purpose provided under Section 2(15) of the Income Tax Act, 1961.

Sandeep Sehgal, Partner- Tax, AKM Global, a tax and consulting firm said the amendment in the rules seeks to expand the onus of reporting by banks and financial institutions for transactions with Non-Profit Organisations as well. “The reduced limit for beneficial ownership to 10% for companies and other entities will expand the scope of reporting and will help in enhancing the check on suspicious transactions,” he said.

The PML (Maintenance of Records) Amendment Rules, 2023 prescribes disclosures from clients as part of client due diligence requirements to be observed by reporting entities. The due diligence documentation requirements which were till now limited to obtaining the basic KYCs of clients such as registration certificates, PAN card copies and documents of officers holding an attorney to transact on behalf of the client, have now been extended.

According to Jhunjhunwala, the enhanced scope includes submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlors and authors. Also, the details of registered office address and principal place of business are now required to be submitted by clients to financial institutions, banking companies or intermediaries.

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