Prevention of Money Laundering Act, 2002

What this chapter covers

This chapter carries about 7 per cent of the III-C examination — one of the heaviest in the syllabus.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Some key provisions of the PMLA, 2002 · Policies and procedures to be put in place by intermediaries to prevent money laundering · Key features of SEBI (Foreign Portfolio Investors) Regulations, 2014.

9.1 Introduction

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. The provisions of PMLA came into force on July 1 2005.

The objective of PMLA 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."

Prevention and confiscation — those are the two purposes.

9.2 Highlights of the Act

Section 3 — the offence

"Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of the offence of money laundering."

The Act then breaks that into six processes. A person is guilty if found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely: (a) concealment; or (b) possession; or (c) acquisition; or (d) use; or (e) projecting as untainted property; or (f) claiming as untainted property, in any manner whatsoever.

Six processes, and one is enough — one or more.

And the offence does not end when the act ends: the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

A continuing offence — which matters for limitation and for jurisdiction.

Section 4 — punishment

"Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and shall also be liable to fine. In cases where the proceeds of crime involved in money-laundering relate to any offence as specified in Paragraph 2 of Part A of the Schedule to the PMLA, 2002, the term of imprisonment shall not be less than 3 years but which may extend to 10 years."

Three years minimum in both cases; seven years ordinarily, ten years for the Paragraph 2 Part A offences — and rigorous imprisonment, plus a fine.

Section 5 — attachment

Where the Director, or any other officer not below the rank of Deputy Director, authorized by the Director, has reason to believe on the basis of the material in his possession that -

(a) any person is in possession of any proceeds of crime; and

(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to the confiscation of such proceeds of crime,

then he may order to attach such property for a period not exceeding 180 days from the date of such order, in such manner as may be prescribed.

Both conditions must hold — possession of proceeds and a likelihood of frustration. 180 days is the outer limit.

The Adjudicating Authority

The Central Government shall appoint an Adjudicating Authority to exercise jurisdiction, powers and authority conferred by or under this Act.

On receipt of a complaint, if the Adjudicating Authority has reasons to believe that any person has committed an offence as per section 3 or is in possession of proceeds of crime, it may serve a notice of not less than 30 days on such person calling upon him to indicate the sources of his income, earnings or assets, out of which or by means of which he has acquired the property which has been attached, or, seized or frozen, the evidence on which he relies and other relevant information and particulars, and to show cause why all or any of such properties should not be declared to be the properties involved in money-laundering and confiscated by the Central Government.

Not less than 30 days, and the burden is on the person to indicate the sources of his income, earnings or assets.

Section 12 — obligations of reporting entities

Every reporting entity shall—

(a) maintain a record of all transactions, including information relating to transactions covered under clause (b), in such manner as to enable it to reconstruct individual transactions;

(b) furnish to the Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed;

(c) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

Note "whether attempted or executed" in (b) — an abandoned transaction is still reportable.

Confidentiality: every information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential.

Two retention periods, both five years. Transaction records are maintained for a period of five years from the date of transaction between a client and the reporting entity; identity records are maintained for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.

From the transaction, or from the end of the relationship — the difference matters.

And an exemption power: the Central Government may, by notification, exempt any reporting entity or class of reporting entities from any obligation under this Chapter.

What must be recorded. The PML Rules require that every reporting entity shall maintain the record of all transactions including the record of all cash transactions of the value of more than ten lakhs rupees or its equivalent in foreign currency.

Ten lakh rupees — the first review question.

Section 12AA — enhanced due diligence

Every reporting entity shall, prior to the commencement of each specified transaction, —

(a) verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, with an alternative process where verification requires authentication of a person who is not entitled to obtain an Aadhaar number;

(b) take additional steps to examine the ownership and financial position, including sources of funds of the client, in such manner as may be prescribed;

(c) take additional steps as may be prescribed to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties.

And the consequence of failure is absolute: where the client fails to fulfil the conditions laid down under sub-section (1), the reporting entity shall not allow the specified transaction to be carried out.

Where suspicion arises: the reporting entity shall increase the future monitoring of the business relationship with the client, including greater scrutiny or transactions in such manner as may be prescribed.

**And the information is kept for a period of five years from the date of transaction.

"Specified transaction" means— (a) any withdrawal or deposit in cash, exceeding specified amount; (b) any transaction in foreign exchange, exceeding specified amount; (c) any transaction in any high value imports or remittances; (d) such other transaction or class of transactions, in the interest of revenue or where there is a high risk or money-laundering or terrorist financing, as may be prescribed.

Sections 12A and 13 — the Director's powers

Section 12A. The Director may call for from any reporting entity any of the records referred to in... section 12, sub-section (1) of section 12AA and any additional information as he considers necessary for the purposes of this Act. Every reporting entity shall furnish to the Director such information as may be required by him... within such time and in such manner as he may specify. And every information sought by the Director... shall be kept confidential.

Section 13. The Director may, either of his own motion or on an application made by any authority, officer or person, make such inquiry or cause such inquiry to be made, as he thinks fit to be necessary, with regard to the obligations of the reporting entity under this Chapter.

He may also order an audit. If at any stage of inquiry or any other proceedings before him, the Director having regard to the nature and complexity of the case, is of the opinion that it is necessary to do so, he may direct the concerned reporting entity to get its records, as may be specified, audited by an accountant from amongst a panel of accountants maintained by the Central Government for this purpose. And the expenses of and incidental to any audit under sub-section (1A) shall be borne by the Central Government.

The Government pays for the audit — a notable feature.

Where a failure is found, the Director may — without prejudice to any other action —

(a) issue a warning in writing or

(b) direct such reporting entity or its designated director on the Board or any of its employees to comply with specific instructions or

(c) direct such reporting entity or its designated director on the Board or any of its employees to send reports as such interval as may be prescribed or

(d) by an order impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.

Ten thousand to one lakh rupees — for each failure. And it reaches not only the entity but its designated director on the Board or any of its employees.

The Director shall forward a copy of the order so passed to every banking company, financial institution or intermediary or person who is a party to the proceedings. The accountant shall mean a Chartered accountant within the meaning of the Chartered Accountants Act, 1949.

And an appeal lies: any person aggrieved by the order passed by the Director or the Adjudicating Officer under the PMLA, 2002 may prefer to appeal to the Appellate Tribunal.

Two officers to appoint

The intermediaries are required to appoint a Principal Officer as per the above Act. The Principal Officer is responsible to discharge the legal obligations to report suspicious transactions to authorities. The Principal Officer is responsible for reviewing the alerts received from regulators/exchanges.

Further Designated Director is defined as a person designated by the reporting entity to ensure overall compliance with the obligations imposed under the Act and Rules.

And both must be notified: every reporting entity shall communicate to FIU Delhi/Regulator on name, designation and address of Designated Director and Principal Officer.

The division of labour is clean. The Principal Officer reports suspicious transactions and reviews alerts; the Designated Director carries overall compliance.

9.3 The SEBI Master Circular on AML and CFT

As per provisions of PMLA, intermediaries registered under SEBI Act shall have to adhere to the provisions as given in the PMLA. A "Principal Officer" needs to be designated who shall be responsible for ensuring compliance of the provisions of the PMLA. SEBI has issued necessary directives vide circulars from time to time, covering issues related to Know Your Client (KYC) norms, Anti-Money Laundering (AML), Client Due Diligence (CDD).

These directives lay down minimum requirements and it is emphasised that the intermediaries may, according to their requirements specify additional disclosures to be made by the clients.

A floor, not a ceiling.

And the circular expects judgment: some of these suggested measures and procedures may not be applicable in every circumstance. Each intermediary shall consider carefully the specific nature of its business, organizational structure, type of client and transaction, etc. to satisfy itself that the measures taken by it are adequate and appropriate and follow the spirit of the suggested measures.

Cross-border rule. In case there is a variance in Client Due Diligence (CDD) / Anti Money Laundering (AML) standards specified by SEBI and the regulators of the host country, branches/overseas subsidiaries of registered intermediaries are required to adopt the more stringent requirements of the two.

The stricter of the two — always.

And where the host country blocks compliance: if the host country does not permit the proper implementation of AML/CFT measures consistent with the home country requirements, financial groups shall be required to apply appropriate additional measures to manage the ML/TF risks, and inform SEBI.

Terrorist financing. The Government order of February 02, 2021 under the Unlawful Activities (Prevention) Act, 1967 (UAPA) covers appointment and communication details of the UAPA Nodal officers · communication of list of designated individuals/entities · funds and assets held as bank accounts, stocks or insurance policies · assets of the nature of immovable properties · real estate agents, dealers or precious metals /stones and other designated non-financial business and profession · implementation of requests received from foreign countries under a resolution passed by the UN Security Council · exemption to be granted in accordance with UNSCR · the procedure for unfreezing of funds... of individuals/entities inadvertently affected by the freezing mechanism · prevention of entry into or transit through India · and the procedure for communication of compliance of action taken under Sec 51 A of UAPA.

9.3.1 Obligation to establish policies and procedures

Senior management of a registered intermediary should be fully committed to establishing appropriate policies and procedures for the prevention of money laundering and terrorist financing and ensuring their effectiveness. Registered intermediaries should:

a) Issue a statement of policies and procedures on a group basis where applicable for dealing with money laundering reflecting the current statutory and regulatory requirements;

b) Ensure that the content of these directives is understood by all staff members;

c) Regularly review the policies and procedures on the prevention of money laundering and terrorist financing to ensure effectiveness. Further to ensure effectiveness of policies and procedures, the person who reviews should be different from the person framing the policies and procedures;

d) Adopt client acceptance policies and procedures that are sensitive to the risk of Money Laundering (ML) and Terrorism Financing (TF);

e) Undertake Client Due Diligence (CDD) measures to an extent that is sensitive to the risk of money laundering depending on the type of client, business relationship or transaction;

f) Have a system in place for identifying, monitoring and reporting suspected money laundering to the law enforcement authorities;

g) Develop staff members' awareness and vigilance to guard against ML and TF.

Note (c) — the person who reviews should be different from the person framing the policies and procedures. Separation of drafting from review is written into the rule.

9.3.2 What the policies must cover

Communication of group policies... to all management and relevant staff that handle account information, securities transactions, money and client records etc. whether in branches, departments or subsidiaries · client acceptance policy and due diligence measures, including requirements for proper identification · maintenance of records · compliance with relevant statutory and regulatory requirements · cooperation with the relevant law enforcement authorities, including timely disclosure of information · and the role of internal audit or compliance function to ensure compliance... including testing of the system for detecting suspected money laundering transactions evaluating and checking the adequacy of exception reports generated on large and/or irregular transactions, the quality of reporting of suspicious transactions and the level of awareness of front line staff.

And on independence: the internal audit function shall be independent, adequately resourced and commensurate with the size of the business and operations, organization structure, number of clients and other such factors.

9.3.3 Written AML procedures

Each registered intermediary should adopt written procedures to implement the anti-money laundering provisions as envisaged under the PMLA. Such procedures should include the following three specific parameters which are related to the CDD process:

(a) Policy for acceptance of clients

(b) Procedure for identifying the clients

(c) Risk Management

(d) Monitoring of Transactions

All of these are required — which is why the fourth review question, asking what written AML procedures need not include, answers None of the above.

9.3.4 Client Due Diligence

The CDD measures comprise the following:

(a) Obtaining sufficient information in order to identify persons who beneficially own or control securities account. And the definition: the beneficial owner is the natural person or persons who ultimately own, control or influence a client and/or person on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.

A natural person, always — the chain is followed until an individual is reached.

(b) Identify the clients, verify their identity using reliable and independent sources of identification, obtain information on the purpose and intended nature of the business relationship;

(c) Verify the client's identity using reliable, independent source documents, data or information. Where the client purports to act for another, the intermediary should verify that any person purporting to act on behalf of such client is so authorized and verify the identity of that person. And in case of a Trust, the reporting entity should ensure that trustees disclose their status at the time of commencement of an account-based relationship.

(d) Identify beneficial ownership and control, i.e., determine which individual(s) ultimately own(s) or control(s) the customer;

(e) Verify the identity of the beneficial owner;

(f) Understand the ownership and control structure of the client; and

(g) Conduct ongoing due diligence and scrutiny, i.e., perform ongoing scrutiny of the transactions and account throughout the course of the business relationship to ensure that the transactions being conducted are consistent with the registered intermediary's knowledge of the customer, its business and risk profile, taking into account, where necessary, the customer's source of funds;

(h) re-verification when there are suspicions of money laundering or financing of the activities relating to terrorism or where there are doubts about the adequacy or veracity of previously obtained client identification data;

(i) periodic updating of all documents, data or information of all clients and beneficial owners... particularly for high risk clients;

(j) registration of a non-profit organisation client on the DARPAN Portal of NITI Aayog, with records kept for a period of five years after the business relationship between a client and the registered intermediary has ended or the account has been closed, whichever is later;

(k) the tipping-off exception: where registered intermediary is suspicious that transactions relate to money laundering or terrorist financing, and reasonably believes that performing the CDD process will tip-off the client, the registered intermediary should not pursue the CDD process, and instead file a STR with FIU-IND;

(l) No transaction or account-based relationship should be undertaken without following the CDD procedure.

Limb (k) is counter-intuitive but important — where completing CDD would warn the client, you stop and report instead.

Client acceptance safeguards

i. No account should be opened anonymous or in a fictitious name or on behalf of other persons whose identity has not been disclosed or cannot be verified;

ii. Factors of risk perception of the client should be clearly defined having regard to clients' location, nature of the business activity, trading turnover etc. and manner of making payment for transactions undertaken. The parameters should enable the classification of clients into low, medium and high risk. Clients of special category (CSC) may, if necessary, be classified even higher.

iii. enhanced due diligence for Clients of Special Category (CSC), which shall include the following: a. Non-resident clients; b. High net-worth clients; c. Trust, Charities, Non-Governmental Organizations (NGOs) and organizations receiving donations; d. Companies having close family shareholdings or beneficial ownership; e. Politically Exposed Persons; f. Clients in high risk countries; g. Non-face to face clients; h. Clients with dubious reputation as per public information available etc.

Eight categories, and the list is open — the above-mentioned list is only illustrative and the intermediary shall exercise independent judgment to ascertain whether any other set of clients shall be classified as CSC or not.

iv. documentation depending on the perceived risk and having regard to the requirements of Rule 9 of the PML Rules;

v. It should be ensured that an account is not opened where the intermediary is unable to apply appropriate CDD measures. This applies where it is not possible to ascertain the identity of the client, or the information provided to the intermediary is suspected to be non-genuine, or there is perceived non-co-operation of the client in providing full and complete information. The intermediary should not continue to do business with such a person and file a suspicious activity report, should evaluate whether there is suspicious trading in determining whether to freeze or close the account, and should be cautious to ensure that it does not return securities or money that may be from suspicious trades — while consult[ing] the relevant authorities in determining what action it should take.

Returning the money can itself complete the laundering — hence the caution.

vi. clear rules on when a client may act on behalf of another person / entity, with transaction limits, additional authority required for transactions exceeding a specified quantity / value, and adequate verification of a person's authority to act on behalf of the customer;

vii. Necessary checks and balances should be put into place before opening an account so as to ensure that the identity of the client does not match with any person having known criminal background or is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide;

viii. The CDD process should necessarily be revisited when there are suspicions of money laundering or financing of terrorism.

9.3.5 Client Identification Procedure

The "Know your Client" (KYC) policy should clearly spell out the Client Identification Procedure (CIP) to be carried out at different stages i.e. while establishing the intermediary–client relationship, while carrying out transactions for the client or when the intermediary has doubts regarding the veracity or the adequacy of previously obtained client identification data.

On Politically Exposed Persons:

(a) intermediaries shall proactively put in place appropriate risk management systems to determine whether their client or potential client or the beneficial owner of such client is a Politically Exposed Person (PEP), including seeking relevant information from the client, referring to publicly available information or accessing the commercial electronic databases of PEPs;

(b) they are required to obtain senior management approval for establishing business relationships with Politically Exposed Persons (PEPs). Where a client has been accepted and the client or beneficial owner is subsequently found to be, or subsequently becomes a PEP, registered intermediaries shall obtain senior management approval to continue the business relationship;

(c) they should also take reasonable measures to verify the sources of funds as well as wealth of clients and beneficial owners identified as PEP.

Senior management approval, twice over — at onboarding, and again if the client becomes a PEP later.

On documents: the client should be identified by the intermediary by using reliable sources including documents / information, the information being adequate enough to satisfy competent authorities (regulatory / enforcement authorities) in future that due diligence was observed, and each original document should be seen prior to acceptance of a copy.

And on refusal: failure by prospective clients to provide satisfactory evidence of identity shall be noted and reported to the higher authority within the intermediary.

No thresholds, no exemptions. Irrespective of the amount of investment made by clients, no minimum threshold or exemption is available to registered intermediaries (brokers, depository participants, AMCs etc.) from obtaining the minimum information/documents from clients... Further no exemption from carrying out CDD exists in respect of any category of clients. In other words, there shall be no minimum investment threshold/ category-wise exemption available for carrying out CDD measures by registered intermediaries. This shall be strictly implemented by all registered intermediaries and non-compliance shall attract appropriate sanctions.

9.3.6 and 9.3.7 Record keeping and retention

Intermediaries should also maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for prosecution of criminal behaviour.

For the audit trail, they should retain: (a) the beneficial owner of the account; (b) the volume of the funds flowing through the account; and (c) for selected transactions the origin of the funds; the form in which the funds were offered or withdrawn, e.g., cash, cheques, etc.; the identity of the person undertaking the transaction; the destination of the funds; the form of instruction and authority.

The retention periods. The records mentioned in Rule 3 of PML Rules need to be maintained and preserved for a period of five years from the date of transactions between the client and intermediary. The records evidencing the identity of its clients and beneficial owners as well as account files and business correspondence shall be maintained and preserved for a period of five years after the business relationship between a client and intermediary has ended or the account has been closed whichever is later. And records of transactions whether attempted or executed, which are reported to the Director, FIU–IND, as required under Rules 7 and 8 of the PML Rules, for five years from the date of the transaction.

One exception overrides all of them: in situations where the records relate to ongoing investigations or transactions which have been the subject of a suspicious transaction reporting, they shall be retained until it is confirmed that the case has been closed.

9.3.8 Monitoring of transactions

Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures. This is possible only if the intermediary has an understanding of the normal activity of the client so that it can identify deviations in transactions / activities.

The intermediary has to pay special attention to all complex, unusually large transactions / patterns which appear to have no economic purpose. It may specify internal threshold limits for each class of client accounts, and the background including all documents/office records/memorandums/clarifications sought pertaining to such transactions and purpose thereof should also be examined carefully and findings be recorded in writing. Those findings shall be made available to auditors and also to SEBI/stock exchanges/FIU-IND/other relevant authorities, during audit, inspection or as and when required.

CDD applies to existing clients too — on the basis of materiality and risk, with the extent of monitoring... aligned with the risk category of the client.

And an internal check: the compliance cell of the intermediary shall randomly examine a selection of transactions undertaken by clients to comment on their nature i.e. whether they are in the nature of suspicious transactions or not.

9.3.9 Suspicious transactions

An illustrative list of circumstances which may be in the nature of suspicious transactions:

Clients whose identity verification seems difficult or clients that appear not to cooperate · asset management services for clients where the source of the funds is not clear or not in keeping with the client's apparent standing /business activity · clients based in high-risk jurisdictions · substantial increases in business without apparent cause · clients transferring large sums of money to or from overseas locations with instructions for payment in cash · attempted transfer of investment proceeds to apparently unrelated third parties · unusual transactions by CSCs and businesses undertaken by offshore banks/ financial services, businesses reported to be in the nature of export/ import of small items.

Any suspicious transaction shall be immediately notified to the Designated/Principal Officer within the intermediary. The notification may be done in the form of a detailed report with specific reference to the clients, transactions and the nature/ reason of suspicion.

And then the crucial instruction: it shall be ensured that there is continuity in dealing with the client as normal until told otherwise and the client shall not be told of the report/suspicion.

In exceptional circumstances, consent may not be given to continue to operate the account, and transactions may be suspended.

Attempted transactions count. It is likely that in some cases transactions are abandoned or aborted by clients on being asked to give some details or to provide documents. It is clarified that the intermediary shall report all such attempted transactions in STRs, even if not completed by clients, irrespective of the amount of the transaction.

High-risk countries. Clients of high-risk countries, including countries where the existence and effectiveness of money laundering controls is suspect or which do not or insufficiently apply FATF standards, are categorized as "CSC", and such clients shall also be subject to appropriate counter measures... further enhanced scrutiny of transactions, enhanced relevant reporting mechanisms or systematic reporting of financial transactions, and applying enhanced due diligence while expanding business relationships with the identified country or persons in that country.

9.3.10 Reporting to FIU-IND

a) The Cash Transaction Report (CTR) (wherever applicable) for each month shall be submitted to FIU-IND by 15th of the succeeding month.

b) The Suspicious Transaction Report (STR) shall be submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash or a series of transactions integrally connected are of suspicious nature. The Principal Officer shall record his reasons for treating any transaction or a series of transactions as suspicious. It shall be ensured that there is no undue delay in arriving at such a conclusion.

c) The Non-Profit Organization Transaction Reports (NTRs) for each month shall be submitted to FIU-IND by 15th of the succeeding month.

d) The Principal Officer will be responsible for timely submission of CTR, STR and NTR to FIU-IND;

e) Utmost confidentiality shall be maintained in the filing of CTR, STR and NTR to FIU-IND.

f) No nil reporting needs to be made to FIU-IND in case there are no cash/ suspicious/ non-profit organization transactions to be reported.

Fifteenth of the succeeding month for CTR and NTR; seven days for STR; and no nil reporting. The second and third review questions answer 15th of the succeeding month and 7 days.

No restrictions, and no tipping off. Intermediaries shall not put any restrictions on operations in the accounts where an STR has been made. Intermediaries and their directors, officers and employees (permanent and temporary) should be prohibited from disclosing ("tipping off") the fact that an STR or related information is being reported or provided to the FIU-IND. This prohibition on tipping off extends not only to the filing of the STR and/ or related information but even before, during and after the submission of an STR.

Before, during and after — the prohibition has no end date.

And no threshold for an STR: the registered intermediaries, irrespective of the amount of transaction and/or the threshold limit envisaged for predicate offences specified in part B of Schedule of PMLA, 2002, shall file STR if they have reasonable grounds to believe that the transactions involve proceeds of crime.

Reports go to the Director, Financial Intelligence Unit-India, New Delhi.

The two officers again. Appointment of a Principal Officer: The Principal Officer is an officer designated by a registered intermediary who should be an officer at the management level. The Principal Officer would act as a central reference point in facilitating onward reporting of suspicious transactions. Appointment of a Designated Director: ... a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the PMLA Act and the Rules.

Three decided matters

Case 9.1: SEBI vs Marfatia Stock Broking — no penalty. SEBI inspected the broker for April 1, 2012 to March 31, 2013 to see whether an AML Policy was in place within 30 days of the promulgation of SEBI circular ISD/CIR/RR/AML/1/06 dated January 18, 2006. Marfatia had admitted that it had adopted AML policy on June 30, 2009, but showed that though a separate AML Policy was not documented, but the requirements of PMLA were duly incorporated in the relevant policies itself like KYC policy and RMS policy. Since it had documented processes for activities like the Client Registration process and risk management control, the allegation of not complying with the provisions of the circular does not stand established.

On the Principal Officer, Marfatia produced a letter of February 13, 2006 to FIU saying it had appointed one on February 2, 2006, though the copy of the said letter was never brought to the notice of SEBI before the adjudication proceedings and only the proof of despatch... in the form of a courier slip existed, [with] no proof of delivery. Since there is nothing on record to suggest the contrary, Adjudicating Officer was inclined to accept the submission.

The order: the observations made during the inspection were procedural in nature and all of these were complied with after being pointed out by the inspection team. No serious observations were made where the investors' interests would have been adversely affected. The Adjudicating Officer did not find the case fit for imposing monetary penalty and disposed of the Marfatia of the Show Cause Notice.

Case 9.2: SEBI vs Shreepati Holdings & Finance — Rs 3,00,000. SEBI inspected on February 13 and 18, 2015 covering Financial Year 2013-14 and April 1, 2014 till December 31, 2014.

Four findings. The firm had delayed in updating the AML Policy, admitting it had updated the AML Policy on November 23, 2014, which resulted in a delay of 8 months; its argument that the circular did not prescribe any fixed timeline failed because SHF cannot absolve it from the mandatory obligation of immediate compliance.

It generated no alerts of its own — as per the manual transaction reviewing system, SHF had submitted that no suspicious alerts have been generated by it. However, during the said period, SHF had received suspicious transaction alerts from NSE and BSE.

And it closed the exchange alerts blindly. SHF had received 83 alerts from BSE and 54 alerts from NSE during the period of inspection. It was observed in the inspection that SHF closed all the alerts received from the exchanges without assigning any reason for the same and did not maintain any record, either electronic or written, of the reasons for closing those alerts... No additional information or documents were sought from the involved clients.

It had no monitoring system at all: SHF did not have any system/ mechanism to monitor transactions with respect to client transactions vis-à-vis the declared client financials.

The aggravating factor: it rectified in the month of February 2015 only after issuance of SCN in the instant proceedings in August, 2017 i.e., after a delay of more than two years. Had the inspection been not carried out... SHF would have remained non-compliant.

And the reasoning on deterrence: any lapse in non-compliance of the same by an Intermediary poses a serious threat to the national economy and national interest. Therefore, there is a need to impose a penalty on SHF which will act as a deterrent in future.

A penalty of Rs. 3,00,000/- ... was imposed... under Section 15HB of SEBI Act.

Case 9.3: FIU Delhi vs PayPal — Rs 96 lakh. American online payment gateway giant PayPal has been imposed Rs 96 lakh penalty by the FIU for alleged contravention of the anti-money laundering law and accused of "concealing" suspect financial transactions and abetting "disintegration" of India's financial system.

The core charge was its failure to register itself as a "reporting entity" with the federal agency as mandated under the PMLA, the contraventions being called "deliberate and wilful", and the penalty imposed in exercise of powers conferred upon me under section 13(2)(d) of the PMLA, 2002, since there is ample evidence of the wilful violation of the law and, therefore, PayPal cannot be let off with a penalty that should normally be imposed for minor violations.

The order directs the company to pay the fine within 45 days and also register itself as a reporting entity with the FIU, appoint a principal officer and director for communication within a fortnight of the receipt of the order.

PayPal's defence was that it only operates as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary in India and is "not covered within the definition of a payment system operator or financial institution and in turn, not covered under the definition of a reporting entity under the PMLA".

FIU rejected it on the substance of the business model: the business model offered by PayPal clearly indicated that it not only acts as an intermediary but actively undertakes money transfer operations... PayPal undertakes to settle an online transaction by moving money from the customer's account (issuing bank) to the merchant account, which ultimately transmits funds to the merchant's bank account (acquiring bank) when the transaction is finalised. Therefore by virtue of enabling payment system for its users by way of credit card, debit card, money transfer operations, PayPal is functioning as a payment system operator and is therefore deemed to be a reporting entity.

A comparison told against it: while the company "defies" the process in India, its parent company in the US - PayPal Inc. - reports suspicious transactions to the American FIU and also to similar agencies in Australia and the UK.

And the policy concern: if PayPal's contention were accepted, the objective of the anti-money laundering law would be rendered "redundant" and other such entities "will find some reason to technically escape being categorised as one (reporting entity) and frustrate the very purpose and object of the PMLA".

The matter went on. PayPal appealed against the FIU's order before the Delhi High Court. In January 2021, the Court directed the Finance Ministry to constitute a committee comprising its own and Reserve Bank of India's nominee to decide the following question: should providers of payment gateway services be classified as payment system operators? The Court stayed the December 17, 2020 order... subject to the payment gateway maintaining records of all its transactions in a secure server and depositing within two weeks in the high court a bank guarantee of Rs 96 lakh, which PayPal did. In February 2021, The Centre told the Delhi High Court... that it has set up a committee, as directed by it.

The chapter's review questions confirm that cash transaction records cover transactions of the value of more than ten lakhs rupees; that the CTR goes to FIU-IND by 15th of the succeeding month; that the STR is filed within 7 days; and that written AML procedures must include the client acceptance policy, the identification procedure and suspicious transaction reporting — so the answer to what they need not include is None of the above.