Politically Exposed Persons brought under New PMLA Rules [UPSC Current Affairs]

In accordance with the recommendations of the Financial Action Task Force (FATF), the government amended rules to include more disclosures for Non-Governmental Organisations and defined “Politically Exposed Persons” (PEPs) under the Prevention of Money Laundering Act (PMLA).

Politically Exposed Persons under New PMLA Rules Amendments

• Objectives of the amendment: The overarching goal is to achieve legal consistency and eliminate ambiguities prior to the FATF assessment. 
  • There are 40 FATF recommendations that cover seven areas and provide a framework of measures to help countries combat illicit financial flows through laws, regulations, and operational measures to ensure authorities can detect and disrupt financial flows that fuel crime and terrorism.
  • The recommendations are divided into seven categories: 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; competent authorities’ powers and responsibilities and other institutional measures; and international cooperation.
• Fulfilling FATF norms: The move to define “politically exposed persons” (PEPs) under PMLA is intended to bring consistency with the Reserve Bank of India’s (RBI) 2008 circular for KYC norms/anti-money laundering standards for banks and financial institutions, which defined PEPs in accordance with FATF norms.
  • In accordance with FATF, PEP has already been included in the RBI’s master circular. The definition is now included in the PMLA rules, ensuring that the same definition applies everywhere.
• Assessment of India: The amendments are significant in light of the proposed FATF assessment of India, which is expected later this year (2023). India’s assessment is likely to be discussed in the plenary meeting in June, with the possible onsite assessment scheduled for November.
  • The fourth round of mutual evaluation of India has been postponed to 2023 due to the pandemic and a pause in the FATF’s assessment process. Previously, in June 2010, the FATF conducted an evaluation for India.
• PMLA rules: In a March 7 notification, the Ministry of Finance’s Department of Revenue introduced The Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023, which require reporting entities such as financial institutions, banking companies, or intermediaries to disclose beneficial owners beyond the current KYC norms through documents such as registration certificates and PAN.
• Definition of PEP: “Politically Exposed Persons” (PEPs) are 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,” according to a new clause in the PMLA compliance rules.
• Beneficial owner: The amended rules have now lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner, in line with existing provisions of The Income-Tax Act and The Companies Act.
  • “The threshold for beneficial ownership has been lowered to bring the PMLA in line with the Companies Act and the Income-tax Act.”
  • The term ‘beneficial owner’ was defined as having ownership of or entitlement to more than 25% of the company’s shares, capital, or profit. The 25% threshold has now been reduced to 10%, bringing more indirect participants into the reporting net.
• Registration in the DARPAN portal: Reporting entities are also required to register details of the client if it’s a non-profit organisation on the DARPAN portal of NITI Aayog.
  • “Every Banking Company, Financial Institution, or Intermediary, as the case may be, shall register the details of a client, in the case of 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,” says the law.
• Expansion of KYC norms: Due diligence documentation requirements, which were previously limited to obtaining basic KYCs from clients such as registration certificates, PAN copies, and documents of officers holding a solicitor to transact on the client’s behalf, have now been expanded.
  • It now includes the submission of information such as the names of senior management personnel, partners, beneficiaries, trustees, settlers, and authors, depending on the legal form of the organisation. 
  • Clients must now provide the details of their registered office address and principal place of business to financial institutions, banking companies, or intermediaries.
• Amendment to NGO definition: The definition of a non-profit organisation has been updated and linked to the definition of a charitable purpose as defined in Section 2(15) of the Income Tax Act of 1961. 
  • The newly expanded record-keeping requirements would go a long way towards uncovering money laundering activities, which taint the country’s social and economic fabric.

Politically Exposed Persons brought under New PMLA Rules :- Download PDF Here