‘Politically Exposed Persons’, NGOs named in Amended PMLA Rules

· 10% Ownership in a Recipient Body will Fall in “Beneficial Owner” Category

The amendments assume significance ahead of India's proposed FATF assessment, which is expected to be undertaken later this year.

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The Finance Ministry has amended money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries. In addition, it has defined “politically exposed persons” (PEPs) under the Prevention of Money Laundering Act (PMLA) in line with the recommendations of the Financial Action Task Force (FATF).

What do the changes imply?

The new clause in the rules for PMLA compliance defines “Politically Exposed Persons” as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”. The amendment is in relation to foreign PEPs and not domestic ones.

The move to define politically exposed persons under PMLA is to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms, officials said.

“PEP has already been in the RBI’s master circular, in line with FATF. The definition has now been given in the PMLA rules so that the same definition is applicable everywhere,” a senior government official said.

What is the significance of the FATF-related changes?

The amendments assume significance ahead of India’s proposed FATF assessment, which is expected to be undertaken later this year. India’s assessment is likely to come up for discussion in the plenary discussion in June, while the possible onsite assessment is slated for November.

Due to the pandemic and the pause in the FATF’s assessment process, the fourth round of mutual evaluation of India had been postponed to 2023. Before this, the FATF had undertaken an evaluation for India in June 2010.

The FATF, which is the global money laundering and terrorist financing watchdog, has 40 recommendations. In its recommendations, the FATF states that financial institutions should be required to have appropriate risk-management systems to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation.

An official said the broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment. The 40 recommendations cover seven areas and provide a framework of measures. This is to help countries tackle illicit financial flows through laws, regulations and operational measures to ensure authorities can take action to detect and disrupt financial flows that fuel crime and terrorism.

The seven areas are anti-money laundering/counter-terrorist financing; policies and coordination; money laundering and confiscation; terrorist financing and financing of proliferation; preventive measures; transparency and beneficial ownership of legal persons and arrangements; powers and responsibilities of competent authorities and other institutional measures; and international cooperation.

What are the other changes in the PMLA rules?

The amended rules have also lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner, in line with the Companies Act and Income-tax Act.

The term ‘beneficial owner’ was defined to mean ownership of or entitlement to more than 25 per cent of shares or capital or profit of the company, which has now been reduced to 10 per cent, thereby bringing more indirect participants within the reporting net.

Also, reporting entities are now required to register details of the client if it’s a non-profit organisation on the DARPAN portal of NITI Aayog. “Every Banking Company or Financial Institution or intermediary, as the case may be, shall register the details of a client, in case of client being a non-profit organisation, on the DARPAN Portal of NITI Aayog, if not already registered, and maintain such registration records for a period of five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later,” the notification said.

This has been done with the purpose to have some repository of basic information on all NGOs in the Darpan portal of NITI Aayog, one of the officials cited above said.

The definition of a non-profit organisation has also been amended and linked to the definition of charitable purpose provided under Section 2(15) of the Income Tax Act, 1961 to include any entity or organisation, constituted for religious or charitable purposes under I-T Act, that is registered as a trust or society under the Societies Registration Act or any similar state legislation or a company registered under the Companies Act.

The due diligence documentation requirements, which were until now limited to obtaining the basic KYCs of clients such as registration certificates, PAN copies and documents of officers holding an attorney to transact on behalf of the client, have now been extended.

It now includes submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlors and authors, as the case may be, depending upon the legal form of organisation. Also, the details of the registered office address and principal place of business are now required to be submitted by clients to financial institutions, banking companies or intermediaries.