Money laundering is the act of disguising the proceeds of crime by transforming “dirty” money into “clean” money that appears to have been legitimately acquired. Money laundering is an enormous problem that has the potential to destabilize economies, increase corruption, and fuel organized crime. The Prevention of Money Laundering Act (PMLA) was enacted in 2002 by the Indian government to combat money laundering and to prevent and control terrorism financing. The PMLA requires financial institutions, banks, and intermediaries to maintain records of their clients’ and beneficial owners’ identities, as well as account files and business correspondence relating to their clients. These rules are laid down in the Prevention of Money Laundering (Maintenance of Records) 2005 (MOR) Rules. The Maintenance of Records Rules have undergone several changes since their inception to ensure the effective prevention of money laundering and the identification of suspicious transactions.
In this article, we will provide a simplified overview of the Maintenance of Records Rules to assist reporting entities in adhering to the minimum standards set by the legislature.
Obligations of Reporting Entities
The MOR Rules impose certain obligations on all reporting entities, including banking institutions, financial institutions, intermediaries, and other similar entities. These obligations include:
1. Maintaining Records of Clients and Beneficial Owners
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. All information maintained, furnished, or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential. The records referred to in clause of sub-section shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.
2. Identifying Beneficial Owners
Reporting entities must identify the beneficial owner of their clients, if any, as may be prescribed. A beneficial owner is defined as 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.
3. Access to Information
The Director may call for any of the 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. 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.
4. Due Diligence
Reporting entities must perform a certain level of due diligence before engaging in any client transaction. They must verify the identity of the clients engaging 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.
5. Suspicious Transactions
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 a manner as may be prescribed.
6. Additional Transactions
Reporting entities must monitor such other transactions or classes of transactions, in the interest of revenue or where there is a suspicion of money laundering or terrorism financing.
7. Training and Awareness
Reporting entities must ensure that their employees are trained and made aware of the provisions of the PMLA and the MOR Rules, as well as the risks associated with money laundering and terrorism financing.
Penalties for Non-Compliance
The PMLA imposes significant penalties for non-compliance with its provisions, including the MOR Rules. Failure to maintain records, verify identities, or report suspicious transactions may result in imprisonment, fines, or both. In addition, reporting entities may be subject to reputational damage and loss of business.
Conclusion
The Prevention of Money Laundering (Maintenance of Records) 2005 (MOR) Rules are an essential tool in the fight against money laundering and terrorism financing. By adhering to the minimum standards set by the legislature, reporting entities can help prevent these crimes from occurring and ensure that they are not unwittingly facilitating criminal activity. It is essential that all reporting entities understand their obligations under the MOR Rules and take the necessary steps to comply with them to protect themselves and their clients from the negative consequences of non-compliance.
By:
Vijay Pal Dalmia, Advocate
Supreme Court of India & Delhi High Court
Email id: vpdalmia@gmail.com
Mobile No.: +91 9810081079
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