Government amends Prevention of Money Laundering Rules

Government of India vide its notification No. 10/2010-E.S/F.No.6/8/2009-E.S. dated June 16, 2010, has amended the Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (“PML Rules”). The salient amendments to the PML Rules are listed below:

1. The rules amending the PML Rules are called Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Second Amendment Rules, 2010 (“Second Amendment Rules”).

2. Second Amendment Rules provide for insertion of an explanation in Rule 2(1)(g) of the PML Rules that defines the term ‘suspicious transaction’. The newly inserted Explanation is as follows:

"Explanation:- Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist act or by a terrorist, terrorist organisation or those who finance or are attempting to financing of terrorism."

3. Second Amendment Rules have substituted sub rules (1A), (1B) and (1C) of Rule 9 of PML Rules with newly provided sub-rules (1A), (1B) and (1C) of Rule 9. The substituted sub-rules are as follows:

"(1A) Every banking company, financial institution and intermediary, as the case may be, shall determine whether a client is acting on behalf of a beneficial owner, identify the beneficial owner and take all reasonable steps to verify his identity."

The new sub-rule (1A) requires the banking company/financial institution/intermediary to determine if a client is acting on his own behalf or in behalf of any other beneficial owner. If it is established that the client is acting on behalf of any other beneficial owner, the banking company/financial institution/intermediary is obligated to verify the identity of such ‘beneficial owner’.

"(1B) Every banking company, financial institution and intermediary, as the case may be, shall exercise ongoing due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, his business and risk profile and where necessary, the source of funds."

By substituting the new sub-rule (1B), the scope of the due diligence to be conducted on a client has been enhanced to include the source of funds of the client as well.

"(1C) No banking company, financial institution and Intermediary, as the case may be, shall allow the opening of or keep any anonymous account or account in fictitious names or account on behalf of other persons whose identity has not been disclosed or cannot be verified."

By inserting sub-rule (1C), the central government has further clarified that any account shall not be on behalf of any person, whose identity has not been verified.

4. Under Rule 9(1), the following sub-rule (1D) has also been inserted:

"(1D) When there are suspicions of money laundering or financing of the activities relating to terrorism or where there are doubts about the adequacy or veracity of previously obtained customer identification data, every banking company, financial institution and intermediary shall review the due diligence measures including verifying again the identity of the client and obtaining information on the purpose and intended nature of the business relationship, as the case may be."

As it appears from the above sub-rule (1D), the provision requires every banking company/financial institution/intermediary to revisit the due diligence process in case of a client, where there remains suspicions of money laundering/financing of the activities relating to terrorism, or where there are doubts about the adequacy of the previously obtained identification data.

5. Second Amendment Rules provides for an explanation to be inserted in the following Rule 10(3) of PML RulesRule 10(3) stipulates that records about the identity of clients shall be maintained for a period of ten years from the date of cessation of the transactions between the client and the banking company or financial institution or intermediary, as the case may be. The newly inserted explanation defines the terms ‘records of identity of clients’ and ‘cessation of the transactions’. Explanation as inserted is reproduced below:

"Explanation: For the purpose of this rule:-

(i) the expression 'records of the identity of clients' shall include records of the identification data, account files and business correspondence.

(ii) the expression 'cessation of the transactions' means termination of an account or business relationship."