Integrally connected transactions

The Prevention of Money Laundering Act, 2002 makes an intermediary record every cash transaction above Rs 10 lakh.

An obvious way round that would be to break one large payment into several smaller ones. Five payments of Rs 2.5 lakh instead of one of Rs 12.5 lakh.

The Act closes the gap. Where a series of transactions is integrally connected to each other, and the series takes place within one calendar month, and the total exceeds Rs 10 lakh, the whole series has to be recorded — even though no single transaction crossed the line.

The phrase does a second job as well. For suspicious transactions, the rules look not only at transactions that are integrally connected but also at those remotely connected or related.

So the record-keeping question is never just about one payment. It is about what the payment belongs to.

The statutory requirement (Chapter 11, section 11.1). The PMLA stipulates that every banking company, financial institution and intermediary shall maintain a record of all transactions, of the nature and value prescribed, whether such transactions comprise a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month — and shall furnish information of transactions and verify and maintain records of the identity of all its clients.

The three categories of transaction that must be recorded:

How long the records live. The records must be maintained for 10 years from the date of cessation of the transactions between the client and the banking company, financial institution or intermediary.

Where the Act's force comes from. The PMLA forms the core of the Indian legal framework against money laundering; its provisions came into force on 1 July 2005. Its stated objective is to prevent money laundering, to provide for confiscation of property derived from or involved in money laundering, and for connected matters. Section 3 defines the offence of money laundering.

Two different reaches, deliberately. For cash record-keeping the test is integrally connected within a calendar month. For suspicious transactions the net is wider — remotely connected or related transactions come in too, and there is no cash requirement and no monetary threshold in that limb at all.

Illustrative figures applying the workbook's thresholds. A portfolio manager's compliance officer reviews one client's cash dealings for a single calendar month.

Not one of the four crosses Rs 10 lakh. But all four came from the same client, for the same account, in the same calendar month, and the aggregate is Rs 10,60,000 — above the Rs 10 lakh line.

If they are integrally connected, the series must be recorded, exactly as a single Rs 10,60,000 cash transaction would be.

Now change one fact. Move the 26th's Rs 3,10,000 into the next calendar month. The first three total Rs 7,50,000, inside the threshold, and the fourth stands alone at Rs 3,10,000. On the cash limb, neither month's series is reportable.

But the suspicious limb does not stop there. A deliberate split across a month-end, to keep each month under Rs 10 lakh, is precisely the pattern that makes the dealing suspicious — and the suspicious limb catches transactions whether or not in cash, and looks at transactions remotely connected or related, with no monetary threshold. So the compliance officer may still have to report it.

And the file stays open a long time. If this client closes the account in year three, the records must be kept for 10 years from the cessation of transactions — so until year thirteen.

Chapter 11 (Regulatory, Governance and Ethical Aspects of Portfolio Managers), section 11.1 (Prevention of Money Laundering Act, 2002), opens the chapter with the record-keeping obligation, and the chapter's sample question 1 asks directly about the record of transactions to be maintained under the PMLA.

Expect a threshold question — Rs 10 lakh, one calendar month, aggregate exceeding Rs 10 lakh — and a retention question, 10 years from the date of cessation of transactions. The discriminating question is the one that hands you four sub-Rs 10 lakh cash receipts in a month and asks whether anything must be recorded.

• Ten years runs from the cessation of transactions, not from the date of each transaction. That is the single most commonly misread number in the section.
• One calendar month, not thirty days. The limb is drafted on the calendar.
• The aggregate must exceed Rs 10 lakh. The individual transactions must be below it — that is what the second limb is for.
• Suspicious transactions have no cash requirement and no threshold. Any suspicious transaction is reportable, in cash or not, large or small.
• 'Remotely connected or related' applies only to the suspicious limb. The cash record-keeping limb uses the narrower 'integrally connected' test. Applying the wide test to cash records, or the narrow one to suspicious transactions, is the classic error.
• This is a record-keeping and reporting rule, not a prohibition. An integrally connected series is not by itself unlawful; failing to record it is the breach.