The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002

1. Obligations

It is Obligation of;
  1. Banking Companies, 
  2. Financial Institutions and Intermediaries or 
  3. a person carrying on a designated business or profession 
Under section 12 of act to
  1. Maintenance of records – See section 2 and 3 of article for detail 
  2. Furnishing information – information to the Director (financial intelligence) within such time as may be prescribed, 
  3. Keep Confidentiality – information maintained, furnished or verified, save as otherwise provided under any law for the time being in force shall be kept confidential. 
Note – These entities are known as reporting entities for the purpose of this act
Note - The Central Government may, by notification in official gazette, exempt any specific or class of reporting entities from any kind of obligation under this chapter.

2. Records to be Maintained

Reporting entities shall maintain a record of
  • All transactions, as to enable it to reconstruct individual transactions 
  • Specific transactions for which, nature and value may be prescribed, whether such transactions comprise of a single transaction or a series of transactions legally connected to each other, and take place within a single month; 
    1. all individual cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency; 
    2. Where series of transactions integrally connected to each other (may be same person or same account) have taken place within a month and the monthly aggregate value exceeds rupees ten lakhs or its equivalent in foreign currency, although individual transaction may be valued below rupees ten lakhs. 
    3. All cash transactions, where forgery is involved by way use of counterfeit currency notes or bank notes as genuine. 
    4. where transaction is facilitating through any forgery of a valuable security or a document has taken place all suspicious transactions whether or not made in cash; 
    5. details of all cross border wire transfers (where either origin or destination is india), where the value exceeding rupees five lakhs or its equivalent in foreign currency 
    6. Purchase and sale transaction of immovable property, where reporting entity is part (provider of fund) where value of property is rupees fifty lakhs or more 
(Note – These Statement are practically named as CTR (Cash Transaction Report) & STR (Suspicious Transaction Report and submitted to Financial Intelligence unit on monthly basis on 15th day of the succeeding month)
  • Identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients, in such a manner that their identity can be verified. 
Note – Following element of transaction need to be recorded;
  1. the nature of the transactions; 
  2. the amount of the transaction and the currency in which it was denominated; 
  3. the date on which the transaction was conducted; and 
  4. the parties to the transaction. 

3. Procedure for Maintaining & Furnishing Information

Procedure for Maintaining

  • Every reporting entity shall maintain information in respect of transactions with its client in accordance with the procedure and manner as may be specified by its Regulator from time to time. 
  • It is responsibility on part of every reporting entity to develop/evolve an internal mechanism in organisation for maintaining information under this act in such form and manner as may be specified by its Regulator from time to time. 
  • It shall be the duty of every reporting entity, that it’s designated director, officer and employees (known as proper officer) to observe the procedure and the manner of maintaining information as specified by its Regulator. 
  • As per provision of act reporting entity is not only required to maintain records but also need retain them for a specified time. Accordingly rule 6 of the prevention of money-laundering rules, 2005, provides that, the records should be maintained for a period of ten years from the date of cessation of the transactions. 
  • Note – Records for identity is still maintained for 5 years from the date of cessation of the relation 

Furnishing Information

  • The Director (financial intelligence) may call for, from any reporting entity any of the records referred above 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 and format as he may specify. 
  • Save as otherwise provided under any law for the time being in force, every information sought by the Director shall be kept confidential. 
  • Note - Section 15 empowers the Central Government to prescribe, in consultation with the Reserve Bank of India, the procedure and the manner of maintaining and furnishing information for the purpose of implementation of the provisions of the Act. 

4. Maintenance & Verifications of Records of Identity of Clients 

Client can be defined as
  1. A person who is involve in a financial transaction or activity with a reporting entity, and includes 
  2. A person on whose behalf, the above person that engages in the transaction or activity is acting. 
Note - Client may be an individual, a company a partnership firm, a trust or unincorporated association or a body of individuals.
Maintenance - Sector regulators can issue guidelines to reporting entity in regard to ‘records on identity of clients’ shall be maintained along with manner there-of. For example, As per RBI master circular, Banks should frame their KYC policies incorporating the following four key elements:
  1. Customer Acceptance Policy; 
  2. Customer Identification Procedures; 
  3. Monitoring of Transactions; and 
  4. Risk Management. 
Verification - Every reporting entity is required to verify the identity at the time of
  1. opening an account 
  2. executing any transaction above rupees fifty thousand 
  3. transaction, where there is no account-based relationship 
  4. transaction, where any international money transfer operation is carried out 
Note – If any reporting entity has failed to comply with the obligations of regarding identity of clients then, director (financial intelligence) may levy a fine from ten thousand rupees upto one lakh rupees for each failure, apart from administrative sanctions.

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