The Impact of the Finance Act of 2019 on Reporting Entities

The Finance Act of 2019 has brought significant changes in the reporting requirements of financial institutions and intermediaries. The amendments have been made to the Prevention of Money Laundering Act, 2002 (PMLA), which aims to prevent money laundering and terrorist financing. In this article, we will explore the obligations of reporting entities, including banking institutions, financial institutions, and intermediaries, and the impact of the Finance Act of 2019 on their reporting requirements.

Obligations of Reporting Entities

The PMLA requires all reporting entities to maintain records of documents that identify their clients and beneficial owners, as well as account files and business correspondence relating to their clients. The records referred to in the sub-section shall be maintained for a period of five years from the date of the transaction between a client and the reporting entity.

Under Section 12A, the Director may call for any records from any reporting entity, and 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. Every information sought by the Director under sub-section shall be kept confidential.

Additionally, 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 the client fails to fulfill the conditions laid down under sub-section, the reporting entity shall not allow the specified transaction to be carried out.

Impact of Finance Act of 2019 on Reporting Entities

The Finance Act of 2019 has made significant changes to the PMLA, which has affected the reporting requirements of reporting entities. Here are some of the key changes:

1. Access to Information

The most significant change made by the Finance Act of 2019 is the Director’s ability to request any records from the reporting entities. According to Section 12A, banks and various other businesses are required to keep records relating to the kind, size, and currency of transactions as well as the dates on which they were carried out. The following steps must be taken in order to provide such information to the director:

i. Name, designation, and address of the chief officer must be sent.

ii. Every banking company, financial institution, and intermediary may develop an internal mechanism for providing prescribed information in the manner and at the intervals specified by their regulators, according to iii.

2. Due Diligence

Every reporting entity is 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. If the client does not meet the conditions, the reporting entity must not proceed with the transaction.

3. Categorization of Customers

Banks, financial institutions, and financial intermediaries must put documentation requirements for clients trying to open or operate an account or conduct a transaction. This documentation will also help in categorising the customers according to their perceived risk levels, and these categories will further decide the level of due diligence that each body must then conduct. The categories that the reporting entities must consider are:

i. Politically Exposed Persons (PEPs) of foreign origin, customers who are close relatives of PEPs, and accounts of which a PEP is the ultimate beneficial owner;

ii. Non-face-to-face customers; and

iii. Customers with dubious reputations as per public information available.

4. Record-keeping Requirements

Reporting entities are required to maintain records of their clients, beneficial owners, and their account files for a period of five years from the date of the transaction. The Finance Act of 2019 has extended the scope of the records that the reporting entities are required to maintain to include the following:

i. All transactions of value more than INR 50,000 or its equivalent in foreign currency;

ii. The nature of the transactions;

iii. The identity of the clients and their beneficial owners; and

iv. The identity of the individuals authorised to act on behalf of the clients.

In addition to the above, reporting entities are required to maintain a risk-based approach to customer due diligence, which involves assessing and understanding the money laundering and terrorist financing risks associated with each client.

Penalties for Non-Compliance

The Finance Act of 2019 has also introduced strict penalties for non-compliance with the reporting requirements. Any entity that fails to comply with the reporting requirements or provides false information is subject to a penalty of up to INR 10 million or an amount equivalent to the proceeds of the crime, whichever is higher. In addition, any individual who fails to comply with the reporting requirements or provides false information is subject to imprisonment for a term of up to two years or a fine of up to INR 5 million, or both.

Conclusion

The Finance Act of 2019 has significantly impacted the reporting requirements of financial institutions and intermediaries. The changes made to the PMLA require reporting entities to take additional steps in terms of due diligence and record-keeping. Additionally, the penalties for non-compliance have become more severe, emphasising the importance of compliance with these reporting requirements. It is essential for reporting entities to understand and implement these changes to avoid penalties and maintain compliance.

---

---