PMLA

Money laundering is the process of making dirty money look clean. The Prevention of Money Laundering Act, 2002 (PMLA) is the law India uses to stop it. The workbook calls it the core of the legal framework put in place in India to combat money laundering. Its provisions came into force on July 1, 2005.

Its stated objective is "to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto."

The Act does not only punish launderers. It puts duties on the institutions money flows through — every banking company, financial institution and intermediary. A portfolio manager registered with SEBI is an intermediary, so PMLA reaches straight into a PMS: into how clients are identified, what records are kept and what gets reported.

What must be recorded (Chapter 12, section 12.1).

The offence (Section 3). Whoever directly or indirectly attempts to indulge, knowingly assists, is knowingly a party to, or is actually involved in any process or activity connected with the proceeds of crime — including concealment, possession, acquisition or use — and projects or claims it as untainted property. Punishment is under Section 4.

Obligations of a reporting entity (Section 12). Maintain records of all transactions so individual transactions can be reconstructed; furnish information to the Director; keep records of the identity of clients and beneficial owners, account files and business correspondence. All such information is kept confidential.

Enhanced due diligence (Section 12AA). Before a specified transaction, verify identity by Aadhaar authentication (or another prescribed mode), examine ownership, financial position and sources of funds, and record the purpose of the transaction. If the client fails these conditions, the transaction must not be allowed.

In a PMS. SEBI-registered intermediaries must designate a Principal Officer responsible for PMLA compliance, follow SEBI's directives on KYC, AML and client due diligence (Chapter 12), and — per Chapter 8, section 8.6.2 — report any suspicious transaction to FIU-IND within 7 working days.

Illustrative client and amounts; the thresholds are the workbook's.

A PMS client's account shows these cash deposits into the linked bank account during one calendar month:

No single deposit is above ₹10 lakh, so looking at them one at a time misses the point. But they fall within one calendar month and add up to ₹10.5 lakh, which exceeds ₹10 lakh. They form a series of integrally connected cash transactions that must be recorded.

Now suppose the same client also asks to route a large payment in a way that makes no economic sense for a portfolio account. That is judged as a possible suspicious transaction — and suspicious transactions are recorded whether or not cash is involved. If the portfolio manager concludes it is suspicious, the report goes to FIU-IND within 7 working days.

PMLA opens Chapter 12 (Regulatory, Governance and Ethical Aspects of Portfolio Managers), and Chapter 12's very first sample question asks for the cash-transaction threshold — ₹10 lakh. Chapter 8 (Operational Aspects of Portfolio Managers, section 8.6.2) adds the disclosure side: the AML policy framework SEBI requires of every registered intermediary, the role of FIU-IND, and the 7-working-day reporting deadline. Expect questions on the threshold, the calendar-month aggregation, suspicious transactions not needing cash, and Section 12AA.

• "Only cash transactions are reportable." No — suspicious transactions are covered whether or not made in cash.
• Aggregation is by calendar month, and the aggregate must exceed ₹10 lakh.
• Record-keeping periods are stated two ways in Chapter 12. The opening paragraph says records are kept for 10 years from the date of cessation of the transactions between client and entity. The Section 12 text that follows says transaction records are kept five years from the date of transaction, and identity records five years after the business relationship ends or the account is closed, whichever is later. Section 12AA information is also kept five years. Read which record a question is asking about.
• FIU-IND receives the reports, not SEBI. The deadline is 7 working days (Chapter 8).
• Under Section 12AA, failure to satisfy the checks stops the transaction. It is not a report-and-proceed rule.
• The PMLA Principal Officer ensures compliance with the Act; do not confuse this with the portfolio manager's principal officer under the PM Regulations, who is responsible for portfolio decisions and operations.