PMLA amendments reinforce anti-money laundering efforts

Table of Contents

Introduction
1. Govt. notifies certain activities to be covered under Anti Money Laundering Measures
2. ‘Activities’ not to be covered u/s 2 of the PMLA
3. Conclusion

Introduction

Money laundering is a sophisticated process that involves disguising the proceeds of illegal activities as legitimate funds. In 2002, India introduced Anti-Money Laundering laws officially called as “Prevention of Money Laundering Act (PMLA)” to combat money laundering and terrorist financing. The PMLA aims to prevent and control money laundering activities and confiscate property involved in such activities.

Recently, the Central Government vide notification, S.O. 2135(E), Dated May 9, 2023, made amendments to Section 2 of the PMLA. These amendments include adding directors or secretaries of a company, partners of a firm, trustees of an express trust, and nominee shareholders of a company as reporting entities under the PMLA. These entities are now required to report certain activities undertaken in the course of their business to tackle money laundering.

1. Govt notifies certain activities to be covered under Anti Money Laundering Measures

The Ministry of Finance has notified an amendment to Section 2(1)(sa) of the Prevention of Money Laundering Act, 2002 (PMLA).

The Central Government, by using the authority granted u/s 2(1)(sa)(vi) has notified that certain activities, when carried out on behalf of or for another person in the course of business, will be regarded as activities for the purpose of this sub-clause. These activities are as follows –

• • • Acting as a formation agent of companies and LLPs.
    • Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm, or a similar position in relation to other companies and LLPs.
    • Providing a registered office, business address or accommodation, correspondence or administrative address for a company or a LLP or a trust.
    • Acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust.
    • Acting as (or arranging for another person to act as) a nominee shareholder for another person.

1.1 An individual acting as a formation agent will be regarded as a ‘person carrying on designated business or profession’ under Anti Money Laundering Measures

The Ministry of Finance has notified an amendment to Section 2(1)(sa) of the PMLA to expand its coverage to include individuals acting as formation agents of companies and limited liability partnerships. This means that all individuals involved in the process of incorporating and forming a company or LLP will now be subject to the provisions of PMLA.

However, the term “formation agent” is unclear, making it uncertain whether consultants who assist with company incorporation without formal authority or certification would be subject to the obligations under PMLA.

It is to be noted that advocates, chartered accountants, cost accountants and company secretaries in practice, who are engaged in the formation of the company to the extent of only filing a declaration form are exempted from the purview of PMLA.

1.2 Person acting as director/secretary/partner of a Firm to be covered under Anti Money Laundering efforts

The provisions of PMLA will now apply to a person acting as a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and LLPs, necessitating their compliance with various obligations such as maintaining records of financial transactions, identifying and verifying clients, and reporting suspicious transactions to the financial intelligence unit.

1.3 Relevance of PMLA for Commercial Property Owners renting out

A person providing a registered office, business address, accommodation, correspondence or administrative address for a company, LLPs or a trust has been included in the reporting entity under the Stronger Anti Money Laundering Measures.

This means that any person that provides such services to a company, LLPs or trust will have to comply with the reporting requirements as outlined under PMLA.

However, any activity carried out as part of an agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and where the consideration is subject to deduction of income tax would be exempt from the purview of PMLA.

1.4 Inclusion of “trustees of an express trust” under the purview of PMLA

The Central Government has expanded the scope for Stronger Anti Money Laundering Measures to include persons acting as trustees of an express trust or performing equivalent functions for other types of trust. It increases the level of scrutiny on persons who are involved in managing trusts.

Trustees will need to ensure that they have adequate systems in place to monitor and report on their activities, including any transactions that may be considered suspicious. This could result in increased compliance costs for trustees and potential reputational damage if they fail to comply with reporting requirements.

1.5 Govt. brings ‘nominee shareholders’ under the purview of PMLA

A Nominee Shareholder is the registered owner of shares held for the benefit of another person (the beneficial owner). The beneficial owner may choose to appoint a nominee because they do not wish to have the shares registered in their own name, or they may be required to appoint a nominee.

The reporting requirements under PMLA require companies to disclose the identity of the ultimate beneficial owner (UBO) of the shares held by a nominee shareholder. This means that companies must identify the person who actually owns or controls the shares. Even if they are not listed as registered shareholders.

2. ‘Activities’ not to be covered u/s 2 of the PMLA

The following activities shall not be regarded as an activity for the purpose of section 2(1)(sa)(vi) of the PMLA –

• • •  Any activity that is carried out as part of any agreement of lease, sub-lease, tenancy, or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax.
    • Any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment.
    • Any activity carried out by an advocate, chartered accountant, cost accountant or company secretary in practice. Who is engaged in the formation of the company to the extent of filing only a declaration form.
    • Any activity that falls within the meaning of an intermediary.

3. Conclusion

The recent amendment for Stronger Anti Money Laundering Measures by the Central Government has broadened the scope of the Act and imposed additional compliance obligations on various individuals and entities. These amendments are designed to address the challenges of money laundering and terrorist financing by extending the scope of reporting requirements and strengthening the accountability of entities engaged in financial transactions.