Taxmann's Analysis | Key Amendments to Anti-Money Laundering Rules

Strengthening India’s Financial Security:

Key Amendments to Anti-Money Laundering Rules

Strengthening India’s Financial Security:

Key Amendments to Anti-Money Laundering Rules

Contents Definition of ‘Client due diligence’ has been broadened

6

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

6

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

7

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

7

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

8

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

9

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.

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

5

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.

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.

1 2 3

6

“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; “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 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

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

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.

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.

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.

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

7

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 accountbased 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.

8

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

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.

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

9

Our Associations

Income-tax Department

Indian Institute of Banking & Finance

Income-tax Appellate Tribunal

National Institute of Securities Markets An Education Initiative of SEBI

10

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

ABOUT TAXMANN

About TAXMANN Our mission at Taxmann is ‘Spearheading the pursuit of expertise & authenticity’. We at Taxmann strive to provide authentic and fastest reporting of information. We are proud to call ourselves the #1 source for everything on Tax and Corporate Laws in India. Our domain knowledge of more than 60 years has helped us in being trusted by more than 500K legal professionals across the country.

Taxmann Alliance is the only publishing house in India with complete backward and forward integration, right from self-owned paper printing unit to in-house research and editorial team, and finally reaching the readers through its own distribution network all across India. The group has also ventured into the technologies division since 2007.

Taxmann Alliance consists of four independent verticals:

Research & Editorial Taxmann Research & Editorial comprises of an enthusiastic team of over 200 Legal associates.

They are responsible for keeping the readers abreast of the latest developments in the judicial, administrative and legislative fields in the form of authentic articles and updates.

Sales & Marketing At Taxmann, we believe in marketing our products through various refined sales channels, with a diverse network of Dealers & Distributors and an in-house marketing team.

A quick preview of the strength of our sales is listed below:

Delhi-NCR

50+ Andhra Pradesh & Telangana

15+

Printing

Gujarat Maharashtra

50+

45+

Tamil Nadu Karnataka

25+

15+

Rajasthan West Bengal

10+

10+

Independent Dealers & Distributors, PAN-India

900+

Tan Prints has been carrying out specialized printing jobs since the 1980s in their beautifully landscaped facility spread over 10,000 sq. meters. Tan Prints has a strong presence in Nigeria, Ghana, Ethiopia, Rwanda, Uganda and Kenya. It not only caters to reputed Book Publishers but also Governments, Universities and Institutes.

Technologies Taxmann’s excellent team of professionals offers the best in class end-to-end website and App designing, development and maintenance solutions.

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules

11

Research & Editorial 21/35, West Punjabi Bagh, New Delhi – 110026 Phone : +91-11-45662200 | E-mail : editorial@taxmann.com Printing - Tan Prints 44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) Phone : 01276-278155-56 | Mobile : 9896514100 | E-mail : sales@tanprints.com Technologies 59/32, New Rohtak Road, New Delhi - 110005 (India) | Phone : +91-11-46462222 | E-mail : technologies@taxmann.com

Delhi: 59/32, New Rohtak Road, New Delhi - 110005 (India) Tel: +91-11-45562222 | For Support Enquiry: support@taxmann.com For Sales Enquiry: sales@taxmann.com | Skype ID: taxmannindia Mumbai: 35, Bodke Building, Ground Floor, MG Road, Opp. Mulund Railway Station, Mulund (W), Mumbai - 400080 Tel: +91-022-25934806/07/09, 25644807 | Mobile: 09322247686, +91-9619668669 Email: sales.mumbai@taxmann.com, nileshbhanushali@taxmann.com Ahmedabad: 7, Abhinav Arcade, Ground Floor, Nr. Bank of Baroda, Pritam Nagar Paldi, Ahmedabad - 380007 Tel: +91-079-26589600/02/03 | Mobile: +91-9909984900, 9714105770, 9714105771 Email: bdurgaprasad@taxmann.com, sales.ahmedabad@taxmann.com Hyderabad: 4-1-369-Indralok Commercial Complex Shop No. 15/1 - Ground Floor, Beside Hotel Jaya International Reddy Hostel Lane Abids Hyderabad - 500001 Mobile: +91-9391041461/09322293945 | Email: bdurgaprasad@taxmann.com, sales.hyderabad@taxmann.com Pune: Office No. 14, First Floor, Prestige Point, 283 Shukrwar Peth, Opp.Chinchechi Talim, Nr. BSNL office, Bajirao Road, Pune - 411002 Mobile: 9822411811, 9834774266, 9322293945 | Email: sales.pune@taxmann.com

For Contact & Assistance: Tel. : +91-11-45562222 | E-mail : support@taxmann.com, sales@taxmann.com

www.taxmann.com

Follow us

12

Strengthening India’s Financial Security: Key Amendments to Anti-Money Laundering Rules