[Analysis] Strengthening India’s Financial Security | Key Amendments to Anti-Money Laundering Rules

Table of Contents

1. Introduction
2. Definition of ‘Client due diligence’ has been broadened
3. Reporting Entities must implement group-wide programmes against money laundering and terror financing
4. Principal officer of REs must promptly furnish information relating to suspicious transactions to director
5. Reporting entity must ensure that the furnishing of information to directors is kept confidential
6. Enhancement in scope of Client Identification and Verification Requirements for Reporting Entities
7. Reporting entities must immediately obtain ‘client due diligence’ records from third parties

1. Introduction

The Government vide. Notification No. G.S.R 745(E), dated October 17, 2023, notified the Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules, 2023. As per the amended norms, the reporting entities must immediately obtain client due diligence records from third parties or from the Central KYC Records Registry.

The key highlights include

(a) broadening the definition of ‘Client due diligence ’,

(b) enhancement in the scope of client identification and verification requirements for reporting entities and

(c) requiring principal officer of REs to promptly furnish information relating to suspicious transactions to director.

The amended norms are effective from 17.10.2023.

The key highlights of the amendments are discussed in detail below –

2. Definition of ‘Client due diligence’ has been broadened

Extant Norms

As per Rule 2(1)(b) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, the term “ client due diligence” means due diligence carried out on a client referred to in section 2(1)(ha) of the Act¹.

Amended Norms

The amended norms broaden the scope of the definition by incorporating the phrase “using reliable and independent sources of identification”. As a result, the term “client due diligence” now covers due diligence carried out on a client as defined in section 2(1)(ha) of the Act by using reliable and independent sources of identification.

Comments

The amendment aims to enhance due diligence by expanding the criteria for identifying and managing clients, specifically by emphasizing the use of reliable and independent identification sources. This broadened approach strengthens the overall due diligence process in financial operations.

3. Reporting Entities must implement group-wide programmes against money laundering and terror financing

Extant Norms

As per Rule 3A of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, groups² are required to implement group-wide policies for the purpose of discharging obligations under the PMLA Act, 2002.

Amended Norms

The amended norms require every reporting entity³ which is part of a group must implement group-wide programmes against money laundering and terror financing. This includes group-wide policies for sharing information required for the purposes of client due diligence and money laundering and terror finance risk management. This is in addition to the groups implementing group-wide policies.

Further, such programmes shall also include adequate safeguards on the confidentiality and use of information exchanged, including safeguards to prevent tipping off.

Comments

The amended norms mandating reported entities (REs) to implement group-wide programmes aim to strengthen anti-money laundering and counter-terror financing efforts. These measures are crucial for preserving the integrity of the financial system and safeguarding against illicit activities.

4. Principal officer of REs must promptly furnish information relating to suspicious transactions to director

Extant Norms

Rule 8(2) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 prescribes a specific timeline for providing information to the director. It requires the Principal Officer of a reporting entity to promptly furnish the information in writing, by fax or by electronic mail to the director within 7 working days of becoming satisfied that the transaction is suspicious. This requirement applies to transactions outlined in Rule 3.

Amended Norms

The amended norms no longer prescribe a specific timeline. Instead, they stipulate that the Principal Officer of a reporting entity must promptly furnish the information in writing, by fax or by electronic mail to the director upon becoming satisfied that the transaction is suspicious.

Comments

The amended norms offer flexibility by removing the specific timeline requirement, emphasizing prompt reporting when the principal officer is satisfied that a transaction is suspicious. This simplifies and streamlines the reporting process.

5. Reporting entity must ensure that the furnishing of information to directors is kept confidential

A new sub-rule has been added to Rule 8 which states that every reporting entity, its directors, officers and all employees must ensure that the fact of maintenance of records and furnishing of information to the director is kept confidential. This assures the preservation of confidentiality regarding record maintenance and information submission to the director, bolstering data security.

6. Enhancement in scope of Client Identification and Verification Requirements for Reporting Entities

Extant Norms

As per Rule 9(1) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, every reporting entity must, at the time of commencement of an account-based relationship, undertake several key obligations. These include the identification of clients, verification of their identities and obtaining information on the purpose and intended nature of the business relationship.

In addition to this, the reporting entity is required to determine whether a client is acting on behalf of a beneficial owner, identify the beneficial owner and undertake all necessary steps to verify the identity of the beneficial owner.

Also, the reporting entity, in all other cases, must verify the identity of clients while carrying out transactions of an amount equal to or exceeding Rs 50,000, whether conducted as a single transaction, interconnected transactions or any international money transfer operations.

Amended Norms

As per the amended norms, every reporting entity must, at the time of commencement of an account-based relationship or while carrying out occasional transactions of an amount equal to or exceeding Rs 50,000, undertake several key obligations. These obligations include identifying clients, verifying their identity using reliable and independent sources of identification and obtaining information on the purpose and intended nature of business relationship.

Further, the reporting entity is required to determine whether a client is acting on behalf of a beneficial owner, identify the beneficial owner and undertake all necessary steps to verify the identity of the beneficial owner using reliable and independent sources of identification.

Also, the reporting entity is required to take all reasonable steps to understand the nature of the customer’s business, and its ownership and control.

Comments

The amended norms introduce a significant shift in the obligations of reporting entities concerning client identification and verification. Firstly, the amended norms expand the scope of the obligations of reporting entities. It’s not just at the commencement of an account-based relationship but also during occasional transactions of Rs 50,000 or more, where these obligations apply.

Secondly, the amended norms place a strong emphasis on the use of “ reliable and independent sources of identification ” when verifying client identities. This is a notable change that sets higher standards for the verification process.

Thirdly, the reporting entities are now required to take “ all reasonable steps” to understand the nature of the customer ’s business as well as its ownership and control. This signifies a deeper level of due diligence, which extends beyond identity verification. Overall, the amended norms not only expand the scope but also raise the bar for client identification and verification.

7. Reporting entities must immediately obtain ‘client due diligence’ records from third parties

Extant Norms

As per Rule 9(2) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, reporting entities were obligated to obtain client due diligence records or information within 2 days from a third party or from the Central KYC Records Registry.

Amended Norms

The amended norms require reporting entities to immediately obtain client due diligence records or information from a third party or from the Central KYC Records Registry.

Comments

The amended norms significantly accelerate the process of obtaining client due diligence records. While the extant norms require a 2-day window, the amended norms require immediate action. This ensures timely access to information thereby enhancing the effectiveness of anti-money laundering and counter-terror financing measures.

1. “client” means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting;
2. “group” shall have the same meaning assigned to it in clause (e) of sub-section (9) of section 286 of the Income-tax Act, 1961
3. As per section 2(1)(wa) of PMLA, 2002, “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession