Understanding the Obligations of Reporting Entities under PMLA

Reporting entities such as banking institutions, financial institutions, intermediaries, etc., have various obligations to maintain records, access information, and conduct due diligence to prevent money laundering and terrorist financing activities. This comprehensive guide will provide a clear understanding of due diligence requirements for reporting entities.

Obligations of Reporting Entities

Section 12, 12A, and 12AA of the Prevention of Money Laundering Act (PMLA) states the obligations of reporting entities. Reporting entities must maintain records of documents evidencing the identity of their clients and beneficial owners, account files, and business correspondence relating to their clients. Every information maintained, furnished, or verified must be kept confidential unless otherwise provided under any law for the time being in force. The records must be maintained for a period of five years from the date of the transaction between a client and the reporting entity.

The reporting entity must identify the beneficial owner of its clients, if any, 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, and includes a person who exercises ultimate effective control over a juridical person.

Access to information is also important. 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 must furnish the required information to the Director within the specified time and in the prescribed manner. Every information sought by the Director under sub-section shall be kept confidential, except as otherwise provided under any law for the time being in force.

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 must 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 or transactions in such a manner as may be prescribed.

Due Diligence Requirements

Every reporting entity must 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.

Documentation requirements are also important for banks, financial institutions, and financial intermediaries. Clients trying to open or operate an account or conduct a transaction must provide documentation that will help categorize them according to their perceived risk levels. These categories will further decide the level of due diligence that each body must conduct.

There are several categories of customers that require additional due diligence. 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 require greater scrutiny. Additionally, non-face-to-face customers and those with dubious reputations as per public information available also require additional due diligence.

Prevention of Money Laundering 2005 rules provide guidelines for client due diligence. The guidelines include the following requirements:

1. At the time of the commencement of an account-based relationship, identify the clients, verify their identity, obtain information on the purpose and intended nature of the business relationship and obtain information about the source of funds and wealth of the clients.

2. For existing customers, reporting entities must periodically update the documents, data, and information pertaining to the identity of the clients, their beneficial ownership, and the purpose and nature of the business relationship. This process is known as “Know Your Customer” (KYC) updation.

3. Reporting entities must also have internal procedures in place for monitoring transactions and identifying suspicious activities. Any transaction that seems unusual or suspicious must be reported to the Financial Intelligence Unit (FIU) within two working days of arriving at such knowledge. The FIU is responsible for analyzing the information received and disseminating it to appropriate agencies for action, if necessary.

Conclusion

Due diligence is an essential part of the compliance framework for reporting entities to prevent money laundering and terrorist financing activities. Reporting entities must have robust procedures in place to identify clients, maintain records, and monitor transactions to ensure compliance with the law. They must also perform periodic KYC updation and report any suspicious transactions to the FIU. By following the due diligence requirements, reporting entities can contribute to the fight against money laundering and terrorist financing activities.

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