PMLA Compliance Checklist: What Reporting Entities Need to Know

The Prevention of Money Laundering Act (PMLA) is a critical piece of legislation that seeks to combat the illicit flow of funds in India. Reporting entities, including banking institutions, financial institutions, intermediaries, etc., have a pivotal role to play in ensuring that PMLA guidelines are followed to the letter. In this post, we will provide a comprehensive PMLA compliance checklist that reporting entities must adhere to.

Obligations of Reporting Entities

Section 12, 12A, and 12AA of the PMLA mandate that all reporting entities must fulfil certain obligations (PMLA Compliance). They include:

Reporting entities must maintain records of documents evidencing identity of their clients and beneficial owners, as well as account files and business correspondence relating to their clients. All information maintained, furnished, or verified must be kept confidential, except as otherwise provided under any law. The records must be maintained for a period of five years from the date of transaction between a client and the reporting entity.

Reporting entities must identify the beneficial owner of their clients, as may be prescribed. A beneficial owner is an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted. The reporting entity 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. The information sought by the Director under sub-section shall be kept confidential. The records in clause of Section 12 of sub-section shall be maintained for five years after the business relationship between a client and the reporting entity has ended, or the account has been closed, whichever is later.

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 this Act. 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 manner as he may specify. Every information sought by the Director under sub-section shall be kept confidential.

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. Where 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. Where 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 or transactions in such manner as may be prescribed.

Every reporting entity is under a duty to perform a certain level of due diligence before indulging in any client transaction. They must 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. 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.

Reporting entities must undertake enhanced due diligence measures for politically exposed persons (PEPs) of foreign origin, customers who are close relatives or associates of PEPs, and persons or entities from countries which do not or insufficiently apply the FATF Recommendations. These measures may include obtaining additional identification data, taking measures to understand the customer’s financial profile and the source of funds, and conducting enhanced monitoring of the business relationship.

Reporting entities must report any suspicious transaction to the Financial Intelligence Unit-India (FIU-IND) and also maintain a record of such transactions. Any transaction that appears to have no economic rationale or bonafide purpose, is beyond the normal limits of income, expenditure, or volume of transaction, or where the client is unable to satisfactorily explain the nature of the transaction, must be reported as a suspicious transaction.

Reporting entities must ensure that their employees are trained in the requirements of the PMLA and the rules made thereunder. The training must be appropriate to the nature of the employee’s duties and must be provided at regular intervals. Reporting entities must maintain a record of the training provided to their employees.

Conclusion

The PMLA compliance checklist is an essential tool for reporting entities to ensure that they comply with the requirements of the PMLA. By fulfilling their obligations under the Act, reporting entities can contribute to the fight against money laundering and terrorist financing in India. Compliance with the PMLA can help maintain the integrity of the financial system and safeguard the interests of the public.

---

---