In a bid to combat money laundering and terrorism financing, the Centre on Wednesday announced amendments to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. The newly introduced Prevention of Money Laundering (Maintenance of Records) Third Amendment Rules, 2023, will come into force upon their publication in the official gazette.
According to the amended Rule 2 of the principal rules, reporting entities will need to use reliable and independent sources of identification when conducting transactions governed by the Prevention of Money-laundering Act, 2002. Rule 3A has been substituted to mandate that reporting entities operating as part of a group must implement group-wide programs to combat money laundering and terrorism financing. These programs will involve sharing information necessary for client due diligence and risk management. Additionally, they will include safeguards to maintain the confidentiality of exchanged information and prevent tipping-off.
The government also modified Rule 8 to strengthen the reporting obligations of reporting entities. The principal officer of a reporting entity must promptly provide written information, via fax or electronic mail, to the director if they identify suspicious transactions.
In addition, a new sub-rule (6) has been inserted into rule 8, emphasizing that all reporting entities, their directors, officers, and employees must maintain strict confidentiality regarding the maintenance of records as per rule 3 and the provision of information to the director.
Also, reporting entities must identify clients and verify their identities using reliable and independent sources of identification. This applies when establishing an account-based relationship or conducting occasional transactions of or above ₹50,000. The entities must also obtain information about the purpose and nature of the business relationship, where applicable. Reporting entities are now obligated to take reasonable steps to comprehend the nature of their customer's business, as well as its ownership and control.
Entities need to determine whether a client is acting on behalf of a beneficial owner and undertake all necessary measures to identify and verify the beneficial owner's identity using reliable and independent sources of identification.
Besides this, in cases where the regulator determines that money laundering and terrorist financing risks are effectively managed, reporting entities may complete the verification as soon as reasonably practicable after establishing the relationship. Reporting entities must promptly obtain client due diligence records or information from third parties or the Central KYC Records Registry. Notably, in sub-rule 8, the term "protector" has been added after "settlor" to broaden the scope of individuals subject to due diligence requirements.
Furthermore, the updated rules highlight the importance of international cooperation in combating financial crimes. Reporting entities are now required to undertake countermeasures as requested by international or intergovernmental organizations recognized by the Central Government.
"The inclusion of data from independent sources alongside in-house records will provide authorities with a more detailed and precise understanding of transactions. This enhancement is expected to significantly improve the effectiveness of anti-money laundering initiatives, making it more challenging for illicit financial activities to go undetected," said Anil K Rawal, retired Indian Revenue Service (IRS) officer.
"...Simultaneously, it's vital to strike a balance where the increased number of reports does not unduly burden regulatory agencies. If the outcome of these reports fails to align with the intended purpose of the regulations, regulatory agencies may lose their enthusiasm for thorough follow-up, potentially resulting in a lax system that can be exploited," Rawal said.