Money laundering is a critical problem that affects the global economy. It is a process in which criminals conceal the illegal origin and ownership of the proceeds of their unlawful activities, making it appear as if it was earned legitimately. The Financial Action Task Force (FATF) has identified money laundering as one of the major threats to the integrity of the financial system, and to counter it, many countries have introduced legislation to combat money laundering. In India, the Prevention of Money Laundering Act (PMLA) was enacted in 2002 to tackle the issue of money laundering. Section 12 of PMLA outlines the obligations of reporting entities in preventing money laundering. In this article, we will discuss the role of reporting entities in preventing money laundering and the key takeaways from Section 12 of PMLA.
Who are Reporting Entities?
Reporting entities are institutions such as banking institutions, financial institutions, intermediaries, and other businesses that are involved in financial transactions. Reporting entities have an obligation to report any suspicious transactions that they come across to the authorities.
Obligations of Reporting Entities
Section 12, 12A, and 12AA of the PMLA lay down the obligations of reporting entities in preventing money laundering. The obligations are as follows:
1. Maintain records of documents evidencing identity of clients and beneficial owners as well as account files and business correspondence relating to its clients. Every 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. Identify the beneficial owner, if any, of such of its clients, as may be prescribed. A beneficial owner has been described 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. Maintain a record of documents evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients, However, under Section 12 of PMLA, it is mandated that all the information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, 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.
3. Access to information. The Director may call for from any reporting entity 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. 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.
5. 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 obtaining additional information from the client, and file a suspicious transaction report (STR) with the Financial Intelligence Unit-India (FIU-IND).
6. Implementing Know Your Customer (KYC) and Customer Due Diligence (CDD) measures. Reporting entities are required to conduct KYC and CDD measures to verify the identity of their clients and to assess the risk of money laundering associated with their clients. KYC measures involve verifying the identity of the client, while CDD measures involve assessing the client’s risk profile and monitoring their transactions.
7. Training of employees. Reporting entities are required to provide training to their employees to enable them to recognize suspicious transactions and to report them to the appropriate authorities.
Penalties for Non-Compliance
Reporting entities that fail to comply with the obligations set out in Section 12 of PMLA are subject to penalties, which may include fines and imprisonment. The penalties vary depending on the severity of the offence and can range from a fine of up to INR 10 lakhs to imprisonment for up to seven years.
Key Takeaways
Section 12 of PMLA places significant obligations on reporting entities to prevent money laundering. Reporting entities are required to maintain records of their clients and their transactions, identify beneficial owners, implement KYC and CDD measures, provide training to their employees, and report suspicious transactions to the authorities. Non-compliance with these obligations can result in significant penalties. By complying with these obligations, reporting entities play a critical role in preventing money laundering and maintaining the integrity of the financial system.
[/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][et_pb_post_nav _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][/et_pb_post_nav][/et_pb_column][/et_pb_row][et_pb_row column_structure=”1_4,3_4″ _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”1_4″ _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][et_pb_team_member name=”Vijay Pal Dalmia” position=”Advocate” image_url=”https://jurisnode.com/wp-content/uploads/2023/04/OIP.jpg” _builder_version=”4.20.4″ _module_preset=”default” custom_padding=”||0px|||” border_radii_image=”on|4px|4px|4px|4px” border_color_all_image=”#000000″ box_shadow_style_image=”preset1″ global_colors_info=”{}”][/et_pb_team_member][/et_pb_column][et_pb_column type=”3_4″ _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.20.4″ _module_preset=”default” global_colors_info=”{}”]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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