Compliance Requirements for Reporting Entities: Section 12AA of PMLA

The Prevention of Money Laundering Act (PMLA) is a significant legislation that seeks to curb the proliferation of black money and illegal financial activities in India. The Act imposes specific obligations on reporting entities such as banks, financial institutions, intermediaries, etc., to ensure that they comply with the law’s provisions and prevent money laundering and terrorist financing. In this blog post, we will discuss Section 12AA of the PMLA in detail, which outlines the compliance requirements for reporting entities.

Section 12AA: Compliance Requirements for Reporting Entities

Section 12AA of the PMLA defines the compliance requirements for reporting entities in India. It lays down the following obligations that reporting entities must fulfil to prevent money laundering and terrorist financing:

1. Maintain Records of Clients’ Identity and Beneficial Ownership

Reporting entities must maintain a record of documents that evidence the identity of their clients and beneficial owners, as well as account files and business correspondence relating to their clients. This requirement is applicable to all clients and beneficial owners of a reporting entity, as prescribed by law. Under Section 12 of the PMLA, all information maintained, furnished, or verified must be kept confidential, except as otherwise provided under any law for the time being in force. The records in clause of sub-section shall be maintained for five years from the date of transaction between a client and the reporting entity.

2. Identify Beneficial Owners

Reporting entities must identify the beneficial owner, if any, of their clients, as prescribed by law. The term beneficial owner refers to an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a juridical person. Reporting entities must maintain a record of documents evidencing the identity of their clients and beneficial owners, as well as account files and business correspondence relating to their clients.

3. Provide Access to Information

The Director may call for any records referred to in section 11A, sub-section of section 12, sub-section of section 12AA, and any additional information as he considers necessary for the purposes of the PMLA. Every reporting entity shall furnish to the Director such information as may be required by him under sub-section within such time and in such a way as he may specify. Save as otherwise provided under any law for the time being in force, every information sought by the Director under sub-section, shall be kept confidential. The most recent change made by the Finance Act of 2019 allows directors to request any records from the reporting entities.

4. Record the Purpose and Nature of Transactions

Reporting entities must 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. If a client fails to fulfill the conditions laid down under sub-section, the reporting entity shall not allow the specified transaction to be carried out. If any specified transaction or series of specified transactions undertaken by a client is considered suspicious or likely to involve proceeds of crime, the reporting entity shall increase the future monitoring of the business relationship with the client, including greater scrutiny of transactions in such a way as may be prescribed.

5. Perform Due Diligence

Every reporting entity is also under a duty to perform a certain level of due diligence before indulging in any client transaction. They will have to verify the identity of the clients indulging and undertaking the transaction by following the procedure and the conditions given under the Aadhaar Act, 2016. The verification requires the entities to take additional steps to examine the ownership and financial position, including sources of the client’s funds, record the purpose behind conducting the specified transaction, and the intended nature of the relationship between the transaction parties. The level of due diligence to be performed by the reporting entity shall be in accordance with the risk categorization of clients, business relationships, and transactions. The due diligence measures must be performed at different stages, including the beginning of the business relationship, during the course of the relationship, and when the reporting entity has a suspicion of money laundering or terrorist financing.

6. Appointment of Principal Officer

Every reporting entity must appoint a principal officer who will be responsible for ensuring compliance with the PMLA and other relevant laws, rules, and regulations. The principal officer must be an employee of the reporting entity and should be of a sufficiently senior level to interact with law enforcement agencies and other stakeholders. The appointment of the principal officer must be intimated to the Director within the prescribed time limit.

7. Training of Employees

Reporting entities must provide training to their employees on the prevention of money laundering and terrorist financing. The training should be ongoing and must cover the relevant laws, rules, and regulations, as well as the reporting entity’s policies and procedures for detecting and reporting suspicious transactions. The training must be provided to all employees, including senior management, frontline staff, and support staff, as applicable.

Penalties for Non-Compliance

Non-compliance with the provisions of the PMLA can result in severe penalties for reporting entities, including fines and imprisonment. The penalties may be imposed on the reporting entity, its directors, officers, and employees. Additionally, the Reserve Bank of India (RBI) may impose penalties for non-compliance with anti-money laundering (AML) guidelines.

Conclusion

Section 12AA of the PMLA lays down the compliance requirements for reporting entities in India. These requirements are aimed at preventing money laundering and terrorist financing and promoting a culture of compliance within reporting entities. It is important for reporting entities to understand and comply with these requirements to avoid penalties and reputational damage. Moreover, effective implementation of the PMLA can help in creating a more transparent and accountable financial system in India.

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